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Fed Watcher Summary: Strong Growth and Loose Financial Conditions Keep Fed on Tightening Path

Core Content

This report from Deutsche Bank Research outlines the current expectations for the Federal Reserve's monetary policy, emphasizing that strong economic growth and loose financial conditions are supporting the Fed's ongoing tightening cycle. The report highlights the implications of recent economic data and upcoming events that could influence the Fed's decisions.

Main Points

• Current Fed Outlook: Deutsche Bank expects the Federal Reserve to raise interest rates in December 2017, followed by three more hikes in 2018 (June, September, and December).
• Economic Data Support: Recent data, particularly the Q3 real GDP growth, has been stronger than anticipated, reinforcing the expectation of continued tightening.
• Financial Conditions: Despite the Fed's tightening, financial conditions remain loose, suggesting that the economy is still resilient and able to absorb higher interest rates.
• Inflation and Productivity: The report notes that inflation is overstated and growth is understated by about 0.6 percentage points due to measurement issues, particularly the creation of more productive firms. This does not fully explain the productivity slowdown.
• Oil Price Impact: Recent oil price declines have had a limited but long-lasting effect on core inflation, potentially reducing inflationary pressures through 2020.
• Analyst Support for Powell: There is a strong case for Jerome Powell to become the next Fed chair, based on his experience and leadership style.
• FOMC Preview: The November FOMC meeting is expected to be largely uneventful, as the Fed lacks immediate incentive to change course.
• Key Events to Watch:
  • November 1: FOMC rate decision
  • November 2: Policy and Balance Sheet discussion by Potter; Alternative Reference Rates Event by Powell and Dudley
  • November 3: Housing and Finance discussion by Kashkari; Government Statistics by Bostic

Key Information

• The DB Fed Watcher is a publication by Deutsche Bank's research team, including senior economists Matthew Luzzetti and Brett Ryan, and economist Justin Weidner.
• The report includes disclosures regarding potential conflicts of interest, the independence of the Research Department, and the nature of the information provided.
• It also provides important legal and regulatory information for various jurisdictions, including the United States, Germany, the United Kingdom, Hong Kong, India, Japan, Korea, South Africa, Singapore, Qatar, Russia, the Kingdom of Saudi Arabia, the United Arab Emirates, and Australia and New Zealand.

Risk Factors and Disclaimer

• The report is not an investment recommendation and is intended for financially sophisticated investors.
• It does not take into account individual investment objectives, financial situations, or needs.
• Disclosures are made regarding the potential for conflicts of interest, the use of research for trading purposes, and the nature of the products and services discussed.
• Legal and regulatory information is provided for different regions, emphasizing that Deutsche Bank is not acting as a financial adviser, consultant, or fiduciary.
• The report includes warnings about macroeconomic risks, including interest rate fluctuations, inflation, FX depreciation, and counterparty risk.
• Derivative transactions, such as swaps and swaptions, carry significant risks, including market, counterparty default, and illiquidity risk.
• Currency risk is highlighted, particularly for investors in foreign securities or ADRs.
• The report does not constitute advice and is provided solely for informational purposes.

Conclusion

The DB Fed Watcher report reinforces the expectation that the Fed will continue its tightening cycle, driven by strong economic growth and relatively loose financial conditions. It also outlines the implications of recent data, upcoming FOMC meetings, and potential changes in monetary policy, while emphasizing the importance of due diligence and understanding the associated risks.