Fed expected to tighten QE

26 July, 2017

Mikael Milhoj, Senior Analyst at Danske Bank, believes the Federal Reserve could start its QE tightening in September.

Key Quotes

“We expect the Fed to maintain the Fed funds target range at 1.00-1.25% at this week’s meeting, in line with consensus and market pricing. As it is one of the small meetings, all eyes are on the statement, as there are no updated projections and no press conference”.

“Given the Fed seems to act only at the big meetings, we think the Fed will wait until September to make an announcement on ‘quantitative tightening’, despite many FOMC members thinking they should get going ‘relatively soon’.

“We do not think there will be major changes to the FOMC statement, although it is likely the probability is skewed towards a slightly more dovish tone given inflation has now been weaker than expected for four consecutive months. Based on Janet Yellen’s recent testimony to US congress, the Fed still has faith in the Phillips curve, i.e. the tighter labour market will push wage growth and thus underlying inflation higher eventually. However, in our view, the jobs report for June highlighted the Fed’s dilemma”.

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