The NY Fed has just published the survey of Primary Dealers run by the NY Fed it has run before the December FOMC. This survey is followed very carefully by FOMC members when they meet. Very interestingly, primary dealers now expect the Fed to change its reinvesting policy when the fed funds hits 1.50% (it was 1.25% in November) (this is the interpretation of the FOMC statement’s “well under way”). They expect this to happen in 18 months, so end H2 2018. The majority of primary dealers expect reinvestments to be “phased out over time” and not to be “ceased all at once”.They expect the “phase out” to last 12 months. The Survey also teaches us important points:
- For the first time for long, primary dealers raised their fed funds projections but very modestly (a hike in June 17, one in December 17, one in March 18, one in September 18, one in Dec 18)
- For primary dealers, the probability of fed funds status quo in 2017 fell from 23% in November to 4% in December.
- Interestingly, they lowered (slightly) their estimate of the neutral fed funds rate.
- GDP growth projections have been raised quite substantially for 2018, from 1.9 to 2.4%, while the 2019 forecast has been lowered slightly, to 1.9%, ie their estimate of the longer-run GDP growth. About the fiscal policy, primary dealers expect the rise of US fiscal deficit to account for 0.3% of GDP in 2017 and 0.83% of GDP in 2018.
- Core CPE projections and long-term inflation expectations have been raised, only slightly but this is quite rare.
Big shift of the 10yr yield expectations: 41% chance to be below 2.50% at the end of 2017 (was 78% in November), 32% chance to be between 2.51% and 3%, 27% chance to be above.They indicate that the 10 yr yield has risen because of “changes in outlook for tax policy” and “changes in outlook or gov. spending” more than because of “changes in outlook for monetary policy”