Fed expected to change policy - BBH

Analysts at BBH suggest that of the major central banks, only the Federal Reserve is expected to change policy.  

Key Quotes

“The market has been reluctant to believe it, but the Fed will most likely deliver the third hike this year.  This is precisely what it indicated it would do a year ago.”

“This has not bolstered confidence in the Fed's September dot plots that indicated that another three hikes in 2018 would likely be appropriate.  The median forecast expected two hikes in 2019 and one in 2020.  Investors are less sanguine.  Looking at the Fed funds futures strip, a hike near the middle of next year.  Only a little more than half of another hike is discounted by the end of 2018.”

“As the composition of the Federal Reserve changes, the dot plot may take on greater significance.  It will offer early insight into how the new members view the macroeconomic picture.  The new forecasts will include the new member Quarles forecast.  His dot will replace Fischer's who stepped down after the September forecasts.  Next year's regional bank rotation of FOMC voting members will shift in a more hawkish fashion as the two main doves, the Minneapolis and Chicago Fed represents, move off.”

“Investors will keep a watchful eye on fiscal policy developments.  The reconciliation committee has its work cut out, and it is important to keep in mind that the final bill may look nothing like the House or Senate's versions.  We see two main risks.  The first is that the delicate balance reached to pass the Senate may not be preserved in the final version.”   

“The second is unintended consequences.   The final Senate version contained the Alternative Minimum Tax for corporations.  This was not expected and may have spurred a sell-off of some particularly sensitive sectors until it was clear from the key Republican senators that would be dropped.  Technology shares helped lift the broader indices in the second half of the week.”

“Or consider the effort to address what is dubbed "base-erosion," the transfer of taxable profits in the form of inter-company loans and interest payments.  However, it would hit foreign banks particularly hard, and foreign banks play an under-appreciated role in financial disintermediation; in lending to households and businesses in the United States. This could pose a bigger threat to domestic financial conditions than the shrinking of the Fed's balance sheet.”