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Fed: Neutral rate likely to be 3% - UOB

Analysts at United Overseas Bank Limited, suggest that there is an increased market speculation of a more gradual hiking trajectory or even a rate pause by the Fed in the coming year as it is approaching its neutral rate, which is estimated to be about 3%.

Key Quotes

“Indeed, starting from FOMC Chair Jerome Powell’s rates are “just below” neutral rate shocker, the FED narrative has turned more cautious and data dependent, as a result, we have lowered our FED outlook for 2019 to 2 hikes from 3 hikes previously.”

“This has reinforced our view of gradual recovery in the EUR as well as a gradual topping out of USD/Asia in 2H19. Should there be further intensification of market risk aversion or further downgrade in global growth prospects, this may put further downward pressure on the Fed to hike just once or even pause in 2019, and this will trigger an accelerated EUR recovery and possibly an immediate topping out of USD/Asia.”

“On the other end of the spectrum, a renewed overshoot of US inflation leading to a steeper rate hiking trajectory response from the Fed remains the key upside risk to our USD forecasts. However, with the plunge in oil prices in 4Q18 from a 4-year high of USD 86.74 / bbl (Brent crude) to current levels of about USD 50, coupled with the temporary truce against further hikes in trade tariffs between US and China, the pass-through to higher inflation looks more unlikely compared to just a quarter ago.”

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