It is a testament to the Federal Reserves’ communication and the evolution of investors’ understanding that we can say that the rate hike that the central bank will deliver is not as important as what it says.  A rate hike is a foregone conclusion. According to the CME’s model, there is about an 85% chance of December hike discounted as well.

The effective Fed funds rate is 1.92% with the target range of 1.75%-2.00%. The implied yield of the June 2019 is 2.62%.The market has 70 bp of tightening priced in through the first half of next year. In H2 19, there is another 20 bp discounted.

The new information that investors will receive is an updated economic assessment and updated forecasts. In June, the change of one member’s forecast was sufficient to lift the median forecast to two hikes in H2. In some ways, we should get a validation of this signal. The median forecast is also likely to continue to point to three rate hikes next year. The June forecasts also anticipated one hike in 2020, putting it 50 bp above what the officials see as the long-term equilibrium rate. For the first time, the Fed will extend its forecasts into 2021.

Over the past month, the yield of the entire coupon curve has risen 20-25 bp and the 2-10 year curve has stabilized. This coupled with a review of the breakeven rates suggest that the rise in nominal rates reflects a rise in real rates rather than inflation expectations. The 11 bp rise in the three-month T-bill yield over the same period points to supply as the likely culprit.

Tax Reform 2.0 is composed of three bills make individual tax cuts permanent, create a new savings vehicle, and provide tax incentives to start of business. Although the combination of tax cuts and spending increases have not fully run their course, this other round is in the works. All three bills may not be passed before the November election. However, when the stimulus has exhausted that is when there is much speculation about a “fiscal cliff” or the end of government-spurred expansions in 2020. We suspect the business cycle could peak earlier–the middle quarters of next year–putting the Fed on hold and allowing for a rate cut before the 2020 election.

The US policy mix of fiscal expansion and monetary tightening is continuing to develop in both directions. As we have argued, this is the most bullish policy mix for a currency. At the same time, it puts the US in the best position to weather the disruptions caused by its trade policy. US President Trump’s claim that many countries are taking advantage of the US and the chronic trade deficit illustrates this strikes a responsive chord among many Americans.