Coming up later in the week, a rate hike from the Federal Reserve

I posted previews earlier:

This now via CBA:

  • On Thursday. the FOMC is expected to increase the target range for the federal funds rate by 25bps to 1.75-2.00% (95% priced-in), and raise the cap on its monthly balance sheet reduction by US$10 billion to US$40 billion per month.
  • The minutes from the FOMC's May meeting also suggest the interest rate on excess reserves will increase by only 20bps to 1.95% to guide the effective funds rate near the middle of the 1.75-2.00% range. The minutes also suggest "some participants" want to revise forward-guidance language in the post-meeting statement indicating that the "federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run" or to modify the language stating that `the stance of monetary policy remains accommodative".
  • In our view the USD wil trade on the defensive later this week because the FOMC will not make material upward revisions to the US inflation and median fed funds rate projections.
  • The FOMC will likely bring forward the timing as to when they project the policy-relevant US core PCE deflator to reach its 2% target to 2018 from 2019. This should not be a major surprise to market participants considering the US core PCE deflator has already improved to 1.8% YoY in April and price pressures are rising.
  • Beyond 2018. the FOMC's US core PCE deflator projections are expected to remain contained near or slightly above 2%, consistent with US 10-year breakeven inflation rates (a market-based measure of expected inflation) and the FOMC's symmetric inflation goal. Judging from solid US economic activity and favourable employment conditions, there is a risk the FOMC's median fed funds rate projection for 2018 is raised to 2.375% from 2.125%. But this would roughly be in-line with US interest rate futures. US overnight indexed swaps (015) currently imply about 75bps of fed funds rate hikes over the next twelve months to about 2.37%.