Thoughts about the Fed's balance sheet - BBH

Analysts at Brown Brothers Harriman noted that the Federal Reserve meets this week, but said there is, for all practical purposes, no chance that a rate hike is delivered.  

Key Quotes:

"Whatever the Fed means by the gradual pace of normalization of policy, it precludes rate hikes at two successive meetings.   

Most market participants do not expect a hike at the next meeting in mid-March either.  

Bloomberg's calculation suggests a 33% chance while the CME estimates the market has discounted a 20% chance.   Our own interpolation is closer to the CME than Bloomberg.   

Some investors may have been disappointed with the sub-2% reading on the preliminary estimate of Q4 GDP reported last week, but Fed officials may be comforted by the fact that final domestic sales (GDP excluding net exports and inventories) accelerated to 2.5% from 2.1%.  

The economy is evolving along the lines the Fed suggested.  

The FOMC statement could also acknowledge that market-based measures of inflation expectations are rising. The five-year breakeven is above 2% for the first time in a couple of years and has increased more than 20 bp since the mid-December hike.    

A critical uncertainty is over the fiscal policy of the new US Administration.  

The FOMC's information set, like that of investors, has not changed.  

The first priorities have been on trade and immigration.  

There was nothing in the December FOMC statement about fiscal policy, and this absence can persist."