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Fed: Flexible on further rate hikes – Danske Bank

Analysts at Danske Bank suggest that recent FOMC communication, including yesterday's release of FOMC minutes, continues to highlight the Fed's flexibility on further rate hikes, as the FOMC members think they can afford to be patient hiking further as long as inflation remains under control.

Key Quotes

“As the Fed would probably like to see a rebound in market risk sentiment and an improvement in the global business cycle (and a continuation of solid economic data releases in the US), it supports our view that it will skip a hike in Q1 and wait until Q2 (either in May or June, the timing is more difficult this year now that all meetings may be 'live', as Powell now holds a press conference after every meeting).”

“One important dovish twist in the FOMC minutes is that 'several participants' noted the recent drop in market-based inflation expectation gauges, suggesting it may be an important variable to follow again.”

“Another new thing is that the Fed now also signals some flexibility on the reduction of the balance sheet ('QT'), which may stop earlier than the Fed has aimed for previously (although it has never explicitly set a target for the level of the balance sheet), something we have highlighted many times that it might be forced to do. A more flexible Fed should be positive for risk sentiment. US equities and Treasuries rallied initially after the release only to fall back a bit later in the evening as news broke that Trump might be cancelling a trip to Davos, where he is supposed to meet with the Chinese Vice President.”

 

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