Edmond de Rothschild – Macro Highlights – KEY TAKEAWAYS OF THE WEEK

Economists' insight: The Fed steals Donald Trump’s thunder

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