Hopes of fiscal expansion under President-elect Donald Trump and improvements in the U.S. economy have combined to achieve the near-impossible: financial markets and the Federal Reserve are now singing in unison on the near-term outlook for the central bank's policy rate.
"The market and FOMC head into 2017 with similar views on rates for the first time in years," writes Neil Dutta, head of U.S. Economics at Renaissance Macro Research.
Overnight index swaps imply that the federal funds rate will end 2017 at 1.07 percent as of 11:30 a.m. ET, which would mean the two hikes in 2017 that the median Fed official is anticipating, plus one in December of this year, based on the dot plot would come to pass.
Dutta cited the firming U.S. Markit Composite PMI, rising core capital goods shipments, robust consumer confidence, and accommodative financial conditions as pointing to strong growth ahead. Indeed, the Atlanta Fed's GDP Nowcast for growth in the fourth quarter stands at 3.6 percent as of Nov. 23.
Traders had previously come to see the Fed as the 'Central Bank Who Cried Rate Hikes' — and with good reason, as monetary policymakers have consistently overestimated how high the federal funds rate would rise over the short and medium-term.
Reference : Bloomberg
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