Core inflation to justify further Fed rate hikes in Q2 and Q3 - ING

"Financial markets remain fairly pessimistic with Fed funds futures contracts pricing in no moves this year. We agree that the economy will slow in 2019 but still forecast GDP growth of 2.3%," argue ING analysts ahead of this week's FOMC meeting.

Key quotes

"Moreover, given shrinking economic spare capacity and rising wages, we think core inflation pressures will be on the up, justifying further interest rate hikes – most likely in 2Q and 3Q19."

"We have to acknowledge the Federal Reserve does have other tools that it could use. Fed Governor Lael Brainard has suggested that raising countercyclical buffers is one way that could be used to tighten monetary conditions whilst also shoring up financial risks. However, this seems to have little broad support at this time."

"Alternatively, if there are fears that the yield curve will soon invert (a widely perceived recession indicator) the Fed could accelerate sales of its longer-dated Treasury holdings. An inverted yield curve is painful for the banking system since banks have long-dated assets and short-term liabilities and this environment would deter lending, making a downturn more likely. Selling longer-dated Treasuries would re-steepen the curve, thereby putting up borrowing costs but taking some of the pressure off the financial system."