Economist insights: the Fed is managing expectations to control the US yield curve and the dollar (p.1)
› In line with our expectations, the US Federal Reserve has announced that it will start gradually scaling back its balance sheet from October
› It has also confirmed, as we forecast, that it could raise its Fed Funds rate by 25 bp to 1.50% at the end of 2017. Three rate hikes could follow in 2018, which is our scenario
› However, it has cut its projection for the long-term Fed Funds rate from 3.00% to 2.75%, which means that the long-term neutral rate is 0.75%, as estimated by our models
› This confirms our scenario for US rates to gradually increase, with the yield curve progressively flattening
› The dollar could strengthen, in line with our forecasts, to 1.16$/€ by the end of 2017 and 1.12$/€ by the end of the first half of 2018
› However, the lower long-term rate, which points to a monetary tightening cycle on a smaller scale than expected, could limit the dollar’s upside potential over the medium term
› The upcoming renewal of several FOMC members could increase volatility on the fixed-income and currency markets on a short term basis, but is not expected to significantly change our scenario