Preview of FOMC meeting signed by François Rimeu
18 December 2018
This meeting could be one of the most interesting in recent years. The market is currently pricing a 66% chance for a FED hike on December 19th vs more than 80% at the beginning of the month, and one could make a case for the Fed not to hike considering recent developments:
• Tightening of financial conditions
• S&P 500 down 13% since beginning of October and credit spread widening
• Oil price down 30% leading to sluggish headline inflation forecast for next year
• President Trump saying that a hike would be a big mistake
That being said, we still think the Fed is going to hike and in fact, they have good reason to do so: Macro figures in the US are still very solid, wage inflation is still increasing and the unemployment rate is still very low. On top of that, with the kind of communication they had over the past 3-4 weeks (never mentioning that no hike was a possibility), not moving would hurt a lot their credibility, with consequences difficult to estimate.
The communication should be dovish, with 2019, 2020 and LT dots revised lower. The economic projections should also send a dovish message with GDP growth as well as inflation revised downwards.
The market expects a dovish hike and we think this is what the Fed is going to deliver.