Fed Hike Aftermath Series: FOMC projects three hikes in 2018, while market prices two

In September, FOMC members projected three rate hikes for 2018 after hiking interest rates by 25 basis points three times each this year. And at this week’s FOMC, participants have once again reaffirmed their decision to continue projecting three rate hikes for 2018, despite concerns among policymakers that inflation has consistently remained below FOMC’s target of 2 percent. Speaking at an event earlier this year, outgoing Fed Chair Janet Yellen described the phenomenon as a mystery.

However, the bond market doesn’t seem to be convinced with participants’ assessment of three rate hikes for 2018. Instead, the federal funds rate is pricing two rate hikes for 2018; one in March with 51.7 percent probability and the other one in September with 52.4 percent probability.

While gradual repricing to include the third hike would be supportive for the dollar, it would have less to gain from monetary policies alone, especially with two rate hikes already priced in by the third quarter and with Federal Reserve shrinking its balance sheet in a well-defined pre-determined pace.

The dollar index is currently trading at 93.55