Fed: Uncertainty surrounding the updated dot plot – Nordea Markets

The FOMC meeting on Wednesday will be interesting, and, while a hike is a done deal, there is more uncertainty surrounding the updated dot plot, according to analysts at Nordea Markets.

Key Quotes

“Recently markets have front-run the possibility of a hike of the so-called R* - the longer-run interest rate in the dot plot. 5y1y rates have traded around 3.25% against Fed’s longer-run interest rate at 2.75%. This indicates that markets have already priced in a substantial risk of an upwards revision of the longer-run dot plot. Hence, if the Fed decides to postpone the longer-run dot plot revision until June, it could be a slight dovish disappointment for the recent hawkish Fed bets.”

“The market pricing of the Fed Funds rate is more or less exactly on par with the current dot plot for 2018 (three hikes are priced). If Fed opts for four hikes in total this year in the dot plot (as we expect, three on top of the hike on Wednesday), the market will have some catching up to do again.”