Views and previews from 15 perspectives on the Federal Reserve decision
The following are brief expectations for today's FOMC September policy statement as compiled from the related research reports of 15 major banks.
Overall, the consensus expects the FOMC to maintain the Fed funds target range unchanged, and to formally announce the start of the balance sheet reduction in October.
On the USD front, the focus seems to be on the FOMC's new median inflation forecasts and its dot-plot projections.
Credit Agricole Research: We expect the FOMC to announce the start of balance sheet tapering in October, in line with the parameters already released and that should come as of little surprise to market participants. Chair Yellen is likely to emphasize that that the fed funds rate is the main policy tool while balance sheet normalization should run quietly in the background over several years. We suspect there are risks to this benign view but they are not likely to become relevant until the balance sheet reduction process is in motion. Thus, the main market-moving elements of the announcement are likely to be the statement, press-conference and dot-plot projections.
ING Research: This week's FOMC meeting may not be the non-event that many in the market are seemingly viewing it. "While the long-awaited announcement of the Fed's balance sheet unwind will be the main event, there will be keen interest in the new official forecasts. These may be used to reinforce the message that, while there is little need for aggressive interest rate hikes, the market remains too complacent on the prospect of higher interest rates. We therefore suspect the Fed will keep its positive, longer-term forecasts unchanged and we currently look for a December rate rise followed by two more 25bp hikes next year.
BofAML Research: We expect the FOMC September statement to imply that the Fed is a bit more upbeat about the risks to inflation and growth, however, we do not expect the dots to move, maintaining the expectation of three hikes this year (December hike). Market participants are expecting the September FOMC meeting to be a non-event. Even if the dots fail to shift lower - which could be interpreted as a hawkish signal - the market may discount this guidance beyond year-end given the significant re-shaping of Fed leadership expected in coming months. We see balanced risks for the USD from this FOMC meeting, but we would buy the dip if we get one.
BTMU Research: After the recent inflation pick-up, the FOMC is likely to maintain its view of a rate hike in December, although that decision is finely balanced. If confirmed on Wednesday it will clearly help support the dollar over the short-term...The updated guidance over the outlook for the Fed funds rate should have more impact on the US dollar's performance in the near-term than the well telegraphed announcement from the Fed today that it is likely to begin shrinking their balance sheet in Q4. The Fed has already clearly signalled that they will only very gradually shrink their balance sheet to begin with in an attempt to dampen any potential financial market disruption. The main upside risk for the US dollar would be if the Fed left their plans for the Fed funds rate relatively unchanged.
Barclays Research: We expect no change in interest rates and the announcement of the start of balance sheet normalization, following the blueprint revealed in the June meeting. Although the expected announcement of balance sheet reduction (BSR) at this week's Fed meeting is unlikely to be a material mover for markets, we think the Fed will keep the option of a December rate hike alive amid subdued market pricing. Indeed, after last week's upside surprise in US CPI, we have retained our call for a 25bp December rate hike and our rates strategists remain positioned in 2s10s Treasury flatteners, an environment that is usually accompanied by significant USD appreciation. In that respect, a move in front-end rate differentials should lead the EURUSD to weaken this week.
TD Research: For the Fed, it appears there is not a rate move in the cards today and the announcement of balance sheet reduction has been well-telegraphed over the past few months. We suspect this leaves the FX markets to trade on the details of the dots and forecasts, which are more likely to hurt than benefit the $. Indeed, our base case sees a downward lurch in the dots but not enough of a shift to move the medians. Forecasts will also get close attention, with the balances of risks favoring downside in the DXY and retest of the recent lows.
NAB Research: The Fed looms large this week. While an announcement of the imminent commencement of Fed balance sheet reduction should be discounted, there's a chance that the new median dot forecast for the Fed is lowered to imply no further move this year and/or less next year. We think not, but were it to occur the dollar would be set back, notwithstanding how far market pricing sits beneath the June dot plot.
SEB Research: Although we do not expect the Fed to make a move on the policy rate, we do expect a formal decision to start the reduction of the balance sheet in October. The plan to normalise the balance sheet has been communicated well in advance and since initial caps reducing reinvestments in principal will be small, the launch is unlikely to cause volatility in financial markets. We expect the Fed to hike in December but this is conditional on inflation moving closer to target.
Danske Research: No hike but Fed will announce it will begin shrinking its balance sheet in October. This is widely expected and should not have a major impact on Treasury yields. We expect the median 'dots' to still signal one more hike this year and three hikes next year. The longer-run median 'dot' may be revised down from 3% currently. We do not expect major changes to the statement, as it already says the Fed monitors inflation 'closely'. We are looking forward to hearing Janet Yellen's view on the dilemma with low inflation and unemployment at the same time. Any dips in EUR/USD will be shallow and short-lived but we emphasise that the speed with which EUR/ISD is set to move higher will be reduced going forward.
Morgan Stanley Research: We think the markets are largely pricing in the Fed starting to reduce their balance sheet so the impact on long term rates and the USD should be limited. Instead the focus will be on 2018 median dot. We don't expect the median dots to change, but the mass of dots may move lower as some participants' disinflationary concerns become more acute, which would be modestly USD negative. We think the FOMC is seeking a limited market reaction.
Scotiabank Research: Market expectations are still equivocal on the prospect of a rate increase-barely 50% priced for Dec. We continue to look for a third rate tightening at the end of the year but any signs that conviction is weakening will likely weigh on still fragile USD sentiment. The balance sheet wind down may be modestly USD-supportive; broadly, longer-term yield spreads have moved against the USD this year as global central banks (for the most part) approach the end game of extra-ordinary accommodation...Broadly, markets appear to be positioning for more volatility post FOMC and shading bets towards USD weakness.
RBC Research: The day ahead revolves around the FOMC decision, forecasts and press conference. That the Fed is poised to announce the start of balance sheet run-off and take a pause on rate hikes at the September meeting has been consensus for some time now and should not be news. Interest will therefore be in other aspects of the meeting, such as the evolution of the dot plot and particularly the introduction of the 2020 dot. How this relates to the 2019 dot (and whether the 2019 dot drops to keep the curve sloping up) will be an important signalling device on the timing of the peak in the rate cycle. We think the most likely outcome would be to keep the high in Fed Funds at around 3%, but push that to 2020 from 2019 so as to avoid embedding a peak or plateau in the profile. This outcome would be neutral to slightly USD-positive.
Nomura Research: We expect the primary messages from the 19-20 September FOMC meeting to focus on the commencement of the balance sheet roll off in October. That said we do not expect any additional substantive guidance or details than what has already been provided. Instead, major decisions involving the ultimate size of the balance sheet and its composition will rest with future Fed leadership, in our view. Based on incoming data and the performance of the economy, we expect only several modest changes to the Summary of Economic projections (SEP) compared to June, with the median forecasts for inflation for 2017 and 2018 being marked down in response to the recent weakness in inflation. We also expect the median longer-term federal funds rate to tick down below 3% as members revise down their views of the terminal rate.
UniCredit Research: We expect the committee to announce the gradual normalization of its balance sheet...With the balance-sheet announcement being broadly expected, the bigger question may actually be whether the FOMC will adjust its outlook for short-term interest rates. We do not think it will and anticipate that FOMC members' median interest-rate projections (the "dots") will continue to show another rate hike occurring this year, followed by three more in 2018 and another three in 2019. To be sure, a few individual members may downgrade their rate expectations, but this is unlikely to be enough to move the median. If anything, the biggest risk is for a downward revision of the 2019 "dot".
SocGen Research: The FOMC move is all about putting down a market that Fed policy is getting back to normal. Starting BSN if that's the right term, is a return to 'peace-time' policy before Janet Yellen departs (if she does). It's also an leap into relative unknown (never been done before) which is happening into a market which seems as relaxed as a teenager getting ready for a bungee jump. This market knows no fear. Watching EM sovereign and corporate spreads is critical in the days ahead but if there really is a muted reaction, surely (sounding like a broken record here) the dollar gets a lift as a Dec hike comes into sight....long USD/JPY our chosen tactical poison.
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