Respecting expectations, in March the FED raised the target range of FED funds - the reference for US interest rates - by 0,25 basis points, bringing it to 1,50% -1,75%. The move takes into account the strengthening US economic outlook and greater confidence from the US central bank that the inflation target will be met before the end of the year. In 2018, the Gross Domestic Product of the United States is expected to grow by around 2,7% - 2,8% also thanks to the impact of the expansionary fiscal policy launched by the US government. The FED has seen US GDP grow every quarter since the spring of 2016 on a trend basis, i.e. year over year. And the labor market is also sending signs of strength. Nonfarm payrolls jumped by 313.000 in February, significantly outperforming market expectations and spread across several line items, even excluding the jump in the retail and construction-related sectors.
THREE RATE RISES EXPECTED IN 2019 AGAIN
Having archived the monetary tightening carried out in March, at this point the FED Committee members estimate a total of 3 rate hikes in 2018 and an additional 3 hikes in 2019. This latest forecast is higher than previously estimated (2 raises). And that's not all. The Committee expects 2 more monetary tightening at the cost of money in 2020, with an interest rate that would reach 3,375% and with a rate considered to be equilibrium raised to 2,9% compared to the 2,8% identified previously. This stronger scenario in terms of increases in the cost of money is also being stimulated by inflation-related expectations. The growth of consumer price indices (CPI) is in fact expected to strengthen over the next few months. At a trend level, the forecasts signal a possible exceeding of the threshold of 2,5% for the trend figure. But long-term expectations are also gradually rising, as suggested by the dynamics of the breakeven forward rate.
FUTURE FED MOVEMENTS WILL PUT PRESSURE ON TREASURY BONDS AND THE DOLLAR
The future choices of the FED will condition the yield of the 5,2-year US Treasury Bond, involving various variables. One of the most important is how quickly and intensely tighter monetary policy will be implemented. But on the other hand, another factor will weigh on the yield on the US XNUMX-year bond, namely the if and when the Federal Reserve will be forced to issue more bonds to finance the growing US federal budget deficit just as it is instead committed to reducing its balance sheet. In essence, we will be faced with a real mix of elements which, taken together, will keep the Treasury bond yield under pressure. In the face of an increasingly active protagonist on the scene, the dollar should remain weak in the medium/long term even in a phase of rising US XNUMX-year yields. The US federal budget deficit expected to grow to XNUMX% of GDP and an ECB that will become progressively less accommodating weigh heavily on the greenback.
Source: Outlook Cordusio April 2018
