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Pre Fed Commentary by Hervé Chatot

19 March 2018

This week, the FOMC meeting will be the key event. Jay Powell will give his first press conference as Fed Chair on Wednesday

We expect a 25bp rate hike. The tone of the meeting is likely to be more optimistic and slightly hawkish. Fed members should be more upbeat on the economy with a balance of risks now skewed to the upside.

Since the last meeting, all economic data pointed to further recovery and the outlook has improved. The two fiscal stimuli will likely lead FED members to deliver more constructive projections for the US economy.

Summary of Economic Projections (SEP) will be updated. We expect it will reflect the improved confidence in the economic outlook. GDP growth should be revised higher both in 2018 and 2019 in a range of 2.5% to 2.9%. Elsewhere, we think the FED will revise the path of inflation slightly higher for the next years and to lower the path for unemployment rate as the job market remains very strong.

Regarding the dots plot, we expect a higher median dot over the next two years (+25bp) with some risk for the median longer-run dot to shift up to 3%.

On rates, the market has already fully priced in the March hike and a total of three hikes in 2018. The press conference will be key to see if J Powell could open the door to four hikes this year, which will support an hawkish reaction of the markets.

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