What to expect from the FOMC tonight?
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Morgan Stanley: There are three points in focus: First, the Fed will take the word 'patient' out of the statement trying to regain flexibility. Markets have priced in this likely change. Consequently, its supportive impact on the USD will be minor. Second, the Fed will update its dots. Third, the Fed may consider the impact the higher USD has on import prices. Latest statements referred to "international risks" where USD strength plays....Should the Fed refer to import prices and the valuation of the USD explicitly, then the market would conclude that 'the Fed is having an issue with current USD upward momentum'. Hence, the USD may experience some vulnerability around the release of the Fed statement.
Goldman: We expect the Committee to drop 'patient' from its 'forward guidance' and suggest that the timing and pace of hikes will depend on incoming macro information, but be gradual initially. The Summary of Economic Projections-released alongside the FOMC statement-will likely show a mark-down of the 2015 inflation forecast, reflecting the drop in oil prices. We also expect participants' estimates of the structural rate of unemployment will likely be revised lower, indicating greater remaining slack, and a modest reduction in the 'dots' On balance, we think that the announcements will not be a large surprise for the front-end of the Dollar curve, although the risks remain skewed to the the upside.
Deutsche Bank: We believe Yellen will almost certainly not remark on the USD underlying value (which is the purview of the US Treasury); and again will talk most about the USD in the context of US financial conditions or net exports. In a similar vein, if she is quizzed about the so called 'currency wars', with the presumption that this is a war where the US is a loser, we expect she will likely make it clear that as long as policy easing elsewhere is a driver, then currency weakness is not simply a zero sum game, or only a transference of growth from the US to elsewhere, but should lift global growth in general. We assume this would be seen as providing tacit approval for the ECB's QE program, and easing elsewhere. We have not included the extremely likely removal of the reference to 'patient' as a market mover, since surely the last Yellen semi-annual testimony made it clear the Fed is shifting away from policy being linked to a time frame, to becoming more overtly data dependent.
SEB: Against the backdrop of the strong labor market, the FOMC will probably drop the "patient" language at the March 17-18 meeting. What Yellen says on the press conference will most likely decide the market reaction...While the jobs market is strong, arguably what the Fed Chair wants is a stronger economic backdrop elsewhere too before considering hiking interest rates. While interest rates obviously have to be normalized at some point this is not necessarily happening in June already and in our view dropping "patient" is not such a strong signal that interest rates will soon be lifted. So against the backdrop of the testimony before Congress last month, if anything we expect that the overall impression tomorrow will be leaning on the dovish side. Yellen could, for example, highlight that recent economic data has been on the soft side and that wage growth continues to disappoint.
BofA: In the statement, the FOMC is likely to note the strong labor market and downplay the recent weaker activity data as due to temporary factors (weather; port slowdown). We also anticipate a repeat of the view that inflation will gradually return to target over time, citing anchored survey expectations and a modest rebound in breakevens since the January meeting. Thus, we expect the Committee to drop "patient" from the statement and emphasize the data-dependent nature of policy instead. To retain maximum flexibility, the FOMC could state that policy will be adjusted "meeting-by-meeting," which the market may read as hawkish. To counter a strong market reaction from dropping "patient," the Committee may note that they expect to gradually normalize policy given the outlook and that policy will remain highly accommodative for some time after liftoff. Given the outlook has become less certain, we see some chance that "patient" remains in the March statement. The tone of Yellen's press conference arguably will be the most important determinant of the market reaction to the meeting. In line with her HumphreyHawkins testimony, we expect she will keep open the possibility of rate hikes from June onward. Explicit concern about recent weaker activity data, soft wages and/or low inflation would be seen as dovish by the markets. So too would be reassurances that the Fed will move slowly and deliberately with the subsequent pace of rate hikes. Such remarks could reinforce market expectations that the Fed may wait until September before initiating liftoff, an outcome we see as more likely than not. The risk is that a more balanced set of comments by Yellen results in greater volatility and higher yields as the market puts more weight on a June move.
Credit Agricole: The March FOMC statement will likely drop "patience" from its forward guidance. We believe the March FOMC statement will drop the "patient" reference in its forward guidance. The decision on when and at what pace the FOMC will raise policy rates will be based on incoming economic data and rising confidence that inflation will move towards its 2% objective over the medium term. The considerable progress achieved in reducing labor market slack suggests the FOMC is approaching labor market conditions consistent with its employment mandate. However, the Fed is likely to require more evidence before being reasonably confident that inflation will rise towards its 2% objective over the medium term. We believe the data will not provide the FOMC voters with enough confidence to hike rates until the third quarter, most likely in September. Most Fed officials expect to begin hiking rates this year. We expect the year-end 2015 median fed funds rate projection to be below the December projection, in line with the gradual pace of rate normalization. The equilibrium fed funds rate projection is expected to remain below its longer-term average. Finally, the updated Summary of Economic Projections will likely lower unemployment rate projections as well as core inflation projections.
Barclays: Our US economics team expects the FOMC to end forward guidance and drop "patience" from its statement at the March meeting. Although such an outcome does not guarantee that the first hike will come in June, we think the outlook for employment and activity is robust enough to warrant it. We expect the Fed to downgrade its assessment of the pace of economic activity from "solid" to "moderate" based on the subdued incoming data, which we see as partially dragged lower by adverse weather. We believe the Fed will not be overly concerned by slowing in activity, given that the data suggest the support for activity from falling energy prices peaked in Q4 14, and the committee likely expected growth to slow in Q1 as a result. In addition, we think the committee will maintain its view that inflation will gradually firm toward 2% over the medium term as the economy improves and the transitory effects of "lower energy and other factors" fade. We do not expect the statement to introduce downside risk to inflation from a stronger dollar since doing so would likely lead markets to infer that June rate hikes are off the table; something we do not believe the committee intends to communicate at this stage.
UBS: The March 18 FOMC meeting announcement and press conference have the potential to reshape market expectations around the start and pace of Fed tightening that we can expect. We see three key items to watch the day of the meeting: the inclusion or exclusion of the "patient" phrase, the 2015 Fed funds forecast dot distribution and the 2016 economic outlook. Although we continue to expect the Fed to hike rates in June followed by steady pace of tightening thereafter, these factors have the potential to alter our policy outlook.
Lloyds: Today's key event is expected to be the outcome of the FOMC meeting. The Fed seems set to take the next step towards 'normalizing' monetary policy. Removing the phrase; "it can be patient in beginning to normalize the stance of monetary policy", would leave a June rate hike firmly on the table. An unchanged wording would be an indication that rates are likely to remain at current levels until at least September. We expect them to make this change. However, this does not necessarily mean that the Fed will move in June. Fed Chair Yellen is likely to use her post-meeting press conference to emphasise that any move is data dependent and most FOMC members are unlikely as yet to have made their minds up.
RBS: We expect the FOMC to remove its language that suggests it can be patient in beginning to normalize policy. But beyond that, Chair Yellen is unlikely to give any hints as to the exact timing of a move, as full data dependence implies that the move will depend wholly on how the data unfold. But most of the commentary will likely, in our view, will lean on the positive side and be focused on preparing markets for a normalization in policy that is likely to begin later this year at some point but will be gradual in nature. While that likely limits the scope for Chair Yellen and the FOMC to take an outright dovish stance, that "unclear" stance may be enough to leave participants disappointed about the lack of a true hawkish signal. Heading into the decision we retain core USD longs against both EUR and GBP.
Nomura: At next week's FOMC meeting we expect: Forward Guidance - The committee to drop the reference to being "patient in beginning to normalize the stance of monetary policy." - The FOMC to add language suggesting that future interest rate decisions will be made on a meeting-by-meeting basis. - The Committee may also say in its statement that the decision to drop the reference to being "patient" does not reflect a change in the expected trajectory of policy. Yellen's Press Conference - We expect Chair Yellen to stress, as she did in her recent Congressional testimony, that the Committee's decision to drop the reference to being "patient" does not mean that an increase in interest rates is imminent. - We expect Yellen to acknowledge, probably in response to a question, that the recent appreciation of the dollar may affect the pace of interest rate adjustment.
BNP Paribas: BNP Paribas economics team expects the Fed to drop its "patient" language as widely expected and that the change is likely to be cushioned by commentary warning markets away from fully pricing a June rate hike and emphasizing the importance of the inflation outlook in determining when to begin tightening. Markets will also focus on how the 16% gain in the broad trade-weighted USD over the past nine months is impacting Fed thinking. Our economists expect the press conference to include some discussion around USD strength. A relatively dovish message from the FOMC would not be overly negative for the USD and with the Fed likely to be seen as still on track for tightening by Q3, the damage to the USD would be limited. Our positioning analysis framework suggests JPY positioning remains relatively flat, making USDJPY a safer way to maintain long USD exposure compared with EURUSD.
SocGen: We expect the Fed to drop the "patient" terminology, but also to sweeten the pill by lowering the median "dot" forecasts slightly. The Fed will basically try to slip in the message of incoming rate hikes as delicately as possible without upsetting the market too much. We remain bullish the dollar medium-term given the still lagging expectation of a June rate hike. We are still particularly bearish AUD, NZD and CAD.
Danske: We expect the key phrase that the FOMC can be patient in beginning to normalize the stance of monetary policy to be omitted from the statement released on Wednesday evening. This will mark the final transfer from calendar-based guidance on monetary policy to full data-dependency...The challenge is the lack of wage inflation and the low level of core inflation. Low oil prices and the stronger US dollar are both deflationary and we expect core goods inflation to trend lower in coming months. However, several FOMC members have highlighted that the Fed needs to look at the inflation outlook and the current drivers of low core inflation are temporary. If the labour market continues to improve in line with our expectations, we believe the Fed will look through the low level of core inflation and deliver a first rate hike in June. We expect the pace of hikes to be slow, but not as slow as financial markets are pricing.
BTMU: Today offers the FOMC the perfect opportunity to move away from a time commitment type guidance that has become less appropriate for the US economy given the strength of the labour market. The foreign exchange market and the broader financial markets are well positioned for the word "patient" being dropped from the FOMC statement this evening and being replaced by a paragraph used by Janet Yellen in her semi-annual testimony to Congress in February that clearly tied together the Fed's dual mandate with incoming economic data as what would determine the timing of the first rate increase. Hence, we doubt that the removal of "patient" will fuel a big move in the financial markets.
Credit Suisse: We expect the Federal Open Market Committee to take the next step toward monetary policy normalization by removing the phrase "can be patient" from its post-meeting statement next week. In its place, we expect revamped forward guidance that stresses data dependence and hinges in large part on the outlook for inflation. The removal of "patient" would signal that the FOMC will begin considering a rate hike on a meeting-bymeeting basis and would be a necessary, but not sufficient, condition for the Fed to raise rates at its June meeting, which has been our call. Our base-case scenario is that the Fed will remove "patient" but keep a balanced outlook. We think that this would prompt a bear flattening of the curve, with our preferred expression 6m forward 2s10s bear flatteners. More explicit data dependence should also be constructive for vol in the months ahead, with market expectations likely to remain dynamic and heavily data focused.
NAB: The FOMC rate decision and Chair Yellen's press conference on the 18th will be the highlight this week, where we expect to see the "patient" rhetoric dropped. Voting FOMC members Evans (typically dovish) and Lockhart (neutral to hawkish) will be the first to offer insight thereafter, both speaking the following Saturday.
Westpac: In its written communications, the FOMC (and Chairman Yellen in February testimony) has chosen not to provide specific guidance, instead preferring to keep all options open, on both the timing of the first hike and the path that normalisation will take from there. That said, Yellen hinted that "patient" will be removed from the March 18 statement, meaning subsequent meetings should be live, albeit data dependent. The best characterisation of the policy outlook is "arguably soon, but not quite yet". September remains our expectation.
Commerzbank: The FOMC statement following the meeting on 17-18 March is likely to delete references suggesting the Fed will remain "patient" in raising key interest rates. An absence of this key word indicates the Fed could start raising rates as early as the June meeting.
CIBC: The Fed's mixed message, signaling rate hikes might be coming as early as June, but maybe not as many or with as much certainty, might not get a definitive market response.
We've been all over the FOMC previews as well (well Eamonn has) so you can catch up below;
ForexLive FOMC preview
Eamonn's 2 things to watch
WSJ's 5 things to watch
FT's 6 things to watch (gated)
What Fed members have been saying recently
More bank previews - Goldies, RBC, TD
More in depth from Deutsche Bank, with lionks to CIBC and Barclays
That little lot should carry you a few minutes closer to the announcement
Have some tunes to wash it all down with
