2017: Four Fed hikes in next 12 months

Consensus said:

Markets pricing a 45bps rise in Fed funds rate during 2018. 

We said:

Fed still likely to deliver three more hikes by H1 2018 (in December, March and June), and an additional one before the end of next year as the tax reform boosts growth. 

The fed funds rate remains below inflation, compared with a long-run real average of 1.9%. Even the three hikes we expect by June may take the rate barely above core inflation, as inflation itself is turning up slightly, as are wage settlements. Beyond the rise we are forecasting in fed funds to 2%, further increases will depend on how strong growth is and what form tax cuts take. But with monetary effects anyhow subject to long and variable lags, a shift to minimally positive real short-term rates next spring is unlikely to check the economy’s momentum before the end of 2018.

Outcome:

Markets had to reprice their expectations. Fed hiked 4 times as we expected in Dec 2017, March 2018, June 2018 and Sept 2018.