Analysts from Danske Bank continue to expect that the Federal Reserve stays on hold during 2016 signaling that the FOMC might be too optimistic about the economic situation.

Key Quotes:

“While the statement was quite hawkish, we think Fed chair Yellen was more dovish during her press conference. The statement stated that the ‘labour market has continued to strengthen’ and that growth ‘has picked up from the modest pace seen in the first half of the year’ (the latter, in our view, in conflict with the latest ISM indices and retail sales figures).”

“Although the more hawkish statement puts pressure on our Fed call, we stick to our view that the Fed will not hike this year, especially as we think the Fed may be too optimistic about the current economic situation given the weakness in ISM and retail sales, but it is a close call.”

“Incoming data will be analysed thoroughly in coming months and we may see markets react more to positive/negative data surprises. Also, in our view, one should not be fooled about the Fed’s eagerness to hike as the Fed has communicated an upcoming rate hike the whole year. We still think most voting FOMC members have a dovish-to-neutral stance on monetary policy and when it comes right down to it they would rather postpone the second hike than hike prematurely.”

“It is also worth noting that three voting hawks (George, Mester, Rosengren) all lose their voting rights next year. Markets have priced a 60% probability of a hike by year-end. Market reaction was muted.”