Fed to hike rates but with dovish undertones, BofA says

The US central bank was set to hike its main policy rate for a second time on Wednesday, but overall the announcement would have dovish undertones, according to economists at Bank of America-Merrill Lynch.

Michelle Meyer, Mark Cabana and Athanasiois Vamvakidis said the Federal Open Market Committee would hike the Fed funds rate by 25 basis points to a range of between 1.0% and 1.25%.

That would be followed by a "cautiously optimistic" Fed chair in her follow-up press conference after the meeting.

However, Minnesota Fed president Neel Kashkari might dissent against the decision to raise rates, arguing that the centralbank was falling short of its target for inflation, BofA said.

He might also be joined by Chicago Fed president Charles Evans, they added.

Furthermore, should there be a major downside miss in the data on CPI and retail sales set for release earlier on Wednesday, then the Fed might make substantial revisions to the policy statement it issues after its meetings.

Even so, BofA conceded that it might not be easy for the Fed to deliver a 'dovish' hike.

"Subdued rate expectations suggest it may be challenging for the Fed to communicate a "dovish hike", given the recent shift in market pricing. This could raise policy mistake risks shown in the rates market and lower inflation breakevens. USD impact is expected to be muted, but a negative surprise could come from lower dots," the investment bank said.

Regarding US rate-setters' medium-term projections for inflation, growth and interest rates, BofA said their median forecast for inflation might shift down to 1.7% for 2017, while remaining at 2.0% for next year.

Fed officials were also expected to trim their projection for the rate of unemployment this year from 4.4% to 4.3% but to predict it would edge back to 4.4% over the following two years.