Market unmoved as US Fed takes mildly hawkish stance for 2018: DBS

By: | Updated: March 22, 2018 12:19 PM

The US Dollar (USD) rates were "sanguine" after the US Federal Reserve on Wednesday raised interest rates by 25 basis points while projecting two more hikes for 2018 easing fears that rate hikes would be aggressively frontloaded.

US fed hikes rate but market unmovedThe USD rates were “sanguine” after the US Federal Reserve on Wednesday raised interest rates by 25 basis points (Image: Reuters)

The US Dollar (USD) rates were “sanguine” after the US Federal Reserve on Wednesday raised interest rates by 25 basis points while projecting two more hikes for 2018 easing fears that rate hikes would be aggressively frontloaded. However, it’s the forecast for 2019 and 2020 that lays a steeper path with five hikes. Singapore-based DBS Group said that after the sell-off over the past few months, USD rates are probably “close to neutral” with the market requiring greater evidence of growth and inflation before taking USD rates another leg higher.

“While the Fed sees five-to-six hikes by end-2020, the market is only willing to price in another three-to-four,” the DBS Group said, adding that the currency market was underwhelmed by the Fed’s upgraded economic assessment. The Fed, in its policy meet, lifted its benchmark overnight lending rate by a quarter of a percentage point to a range of 1.50% to 1.75%. Fed chief Jerome Powell newly appointed chief that the central bank is trying to take the middle ground.

“We remain neutral on USD rates in the short term but continue to see a drift higher in the coming quarters,” DBS said. The CPI data in the US has moderated in February while the 5-year breakevens are already firmly above 2%. Higher inflation or increasing budget deficit worries would be needed for 10Y yields to convincingly push past 3%.

The Fed has maintained its bias for three hikes this year and opened the door for four hikes in 2019, the year that it expects core PCE inflation to push above 2%. Hence, there was “no incentive” for the US 10-year treasury yield to rise above the 2.80-2.95% range established since early February. According to a report by Reuters, there will some impact of rates hikes on American Household Budget. While there will be a minor impact on credit card bills, fixed-rate mortgages and the real estate will witness a chilling effect.

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