Fed: December hike likely due to low unemployment rate – Danske Bank

Analysts at Danske Bank suggest that most Fed members putting more weight on labour market data relatively to inflation data is the main reason why they still think the Fed will hike in December.

Key Quotes

“In other words, it is still the belief in the Phillips curve that dominates the Fed. However, we still see a risk Fed will pause its hiking cycle next year due to low inflation, which may not be just ‘transitory’ given the low inflation expectations, although it requires the Fed to put more weight on its inflation mandate. The reason for this is that tightness of the labour market is not the only factor determining wage growth, as second-round effects after many years with low inflation have hit wage growth. When employees expect inflation to remain low, they can live with low wage growth, as real wage growth may still be solid, making it less likely inflation will reach the target.”

“Our base case is currently two hikes next year assuming the Fed continues to put more weight on labour market and growth data. At the moment, the markets price in more than 62% probability of a December Fed hike (up from 50% before the meeting) and 1.8 hikes before year-end 2018. However, as we wrote in our preview, it is more difficult to forecast what the Fed does next year in terms of monetary policy given the four vacant seats in the Board of Governors.”