In the wake of the adoption of the fiscal reform on December 19, markets have revised up sharply their fed funds expectations. Fed funds futures are pricing in almost the same amounts of fed funds hikes for 2018 & 2019 as the FOMC members‘ ‘dots’ (FOMC members expect three rate hikes in 2018 and two in 2019). This is one of the main reasons for which the US long-term yields have risen since the beginning of the year (along with the effective slowdown of the ECB’s net purchases), leading to the correction on equity markets at the beginning of February. While we think that the reassessment of fed funds expectations can go a bit further, it cannot go significantly further as it is unlikely that markets will price in much more rate hikes than FOMC members themselves.
