U.S. Interest Rates Chartbook

[Pages:20]U.S. Interest Rates Chartbook

February 2018

Takeaways

The FOMC March meeting will be Powell's first as Chair. The January minutes confirm that the Committee views the tax cuts with optimism and developments abroad as an additional tailwind, expecting the economy to run above potential for the medium-run. Markets have interpreted Chairman Powell's stance at the twoday Congressional testimony as hawkish.

"We've seen continuing strength in the labor market. We've seen some data that will, in my case, add some confidence to my view that inflation is moving up to target. We've also seen continued strength around the globe, and we've seen fiscal policy become more stimulative."

Fed funds futures are pricing in three rate increases for 2018. A March rate increase is fully priced in and the implied probability for a subsequent hike in June is at 98%.

An increase in long-term yields is supported by a soft but sustained increase in Inflation expectations and moderate upward pressures on term premium. However, term-premium remains negative with near zero long-term duration-risk compression.

Given that the recent budget deal is expected to result in higher economic growth and inflation, we revised upward our interest rates forecasts. We now expect the Fed to raise rates four times ? 25 basis point each, in 2018.

The baseline remains for a gradual increase in long-term yields stabilizing at a higher rate over the forecast horizon due to higher growth, adjustment to higher inflation expectations, and higher term premium.

U.S. INTEREST RATE CHARTBOOK FEBRUARY 2018

U.S. INTEREST RATE CHARTBOOK FEBRUARY 2018

Unconventional monetary policy

FEDERAL FUNDS RATE AND THE 10-YEAR TREASURY NOTE (%)

5.0 First MBS Purchase

4.5

4.0

3.5

3.0

QE2

QE3

Start QE3 Taper

"Operation Twist"

Taper Tantrum

1st Rate Hike

2.5

2.0

1.5

1.0

0.5

0.0

08

09

10

11

12

13

14

15

16

10-Year Treasury Yield

Federal Funds Rate

3rd

5th

Rate

Rate

Hike

Hike

2nd 4th

Rate Rate

Hike Hike

17

18

Source: BBVA Research, Federal Reserve Board and Haver Analytics

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U.S. INTEREST RATE CHARTBOOK FEBRUARY 2018

Dealers' expectations for the long-run fed funds rate remain in line with the median FOMC projection of 2.75%

PROJECTED PACE OF POLICY FIRMING (%)

3.25 3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00

Dealers Survey Median, Jan. 22, 2018

(?) 25th Percentile

FOMC Median, Dec. 13, 2017 (EOP)

Survey of Primary Dealers is formulated by the Trading Desk at the Federal Reserve Bank of New York. Last received date December 4, 2017

Source: BBVA Research, Federal Reserve Bank of New York and Federal Reserve Board

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U.S. INTEREST RATE CHARTBOOK FEBRUARY 2018

Fed funds futures are aligned with the FOMC 2018 trajectory

FED FUNDS FUTURES ? MOST RECENT, 1 WEEK PRIOR, 1 MONTH PRIOR, 3 MONTHS PRIOR (%)

2.750 2.625 2.500 2.375 2.250 2.125 2.000 1.875 1.750 1.625 1.500 1.375 1.250 1.125 1.000

Feb-18

May-18

Aug-18

Nov-18

Feb-19

May-19

Aug-19

Nov-19

Feb-20

May-20

Aug-20

Nov-20

11/22/2017

1/31/2018

2/21/2018

2/28/2018

Source: BBVA Research and Bloomberg

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U.S. INTEREST RATE CHARTBOOK FEBRUARY 2018

Fully priced in March rate hike and 98% probability of a seventh rate increase in June

FED FUNDS FUTURES IMPLIED PROBABILITIES, SEVENTH 25BP HIKE (%)

100

90

80

70

60

50

40

30

20

10

01/31/18

May-18

Jun-18

02/21/18 Jul-18

Aug-18

02/28/18 Sep-18

Source: BBVA Research and Bloomberg

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U.S. INTEREST RATE CHARTBOOK FEBRUARY 2018

Fed funds firming pace forecast

FEDERAL FUNDS RATE (%, Upper Bound, End of Period)

5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Jan-15

Jul-15 Jan-16 Actual

Jul-16

Jan-17 Jul-17 Baseline

Jan-18

Jul-18 Jan-19 Upside

Jul-19

Jan-20 Jul-20 Downside

Source: BBVA Research, Federal Reserve Board and Haver Analytics

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U.S. INTEREST RATE CHARTBOOK FEBRUARY 2018

Baseline forecasts of treasury bill yield

3-MONTH TO 12-MONTH RATES (%)

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

3M

6M

12M

Source: BBVA Research, Federal Reserve Board and Haver Analytics

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