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The United States’ Federal Reserve is expected to hike interest rates in March and thrice this year, based on the higher-than-expected latest inflation print and the hawkish comments from influential New York Fed President William C. Dudley, according to a recent research report from Danske Bank.
Markets have now priced in an 85 percent probability of a March hike and given that markets are calm and growth remains strong, it seems like a good time to hike.
While the Fed is expected to hike three times, inflation pressure is likely to remain subdued, although it is likely to increase from current low levels, and hence it is unlikely that the Fed is going to hike more than it is currently signaling (three hikes).
However, the Fed is still tightening, as the FOMC members have a strong belief in the Phillips curve theory suggesting that the tighter labor market will eventually push wage growth higher, and also they have a tendency to put more weight on labor market data than inflation.
"We also change our call and now expect three hikes (previously two) with the second hike likely in June and the third one in December (obviously it is a bit difficult to distribute three hikes throughout the year, as the Fed so far has been reluctant to move on one of the smaller meetings)," the report added.
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