Bank of American Merrill Lynch on today's FOMC meeting
The FOMC statement is due out at 2 pm ET (1900 GMT) and virtually everyone expects something more dovish but how much more is a matter of debate. Economists at Bank of America Merrill Lynch fear it won't be enough to keep markets happy.
"The Federal Reserve is likely to deliver a message of patience at the 30 January meeting, but we are skeptical it will be as dovish as the market expects," they write in a report.
They expect the statement to be changed to remove the reference to 'further gradual increases' in rates and replace it with something more data dependent.
They see risks of disappointment on the balance sheet. A WSJ report last Friday sparked speculation that Powell will signal a larger permanent balance sheet and flexibility but there may not be a formal announcement in the statement, which could lead to a kneejerk USD rally and risk-off trade.
What they wrote:
USD price action on Wednesday will be determined by Fed guidance with respect to the following: (1) policy bias; (2) assessment of risks; and (3) the balance sheet. Our baseline is for a (1) a soft hiking bias (via removal of 'some further gradual increases,' but likely replacement with 2006-esqe language suggesting that additional tightening may be warranted); (2) a neutral assessment of risks; and (3) flexibility with respect to balancesheet size/runoff, but limited details otherwise. On net, we think the Fed may not be dovish enough given the market's mindset. Accordingly, we see USD event risk skewed to the upside against higher beta FX and to the downside against JPY and CHF, ie, a classic 'risk-off' reaction in FX markets. The yen looks poised to outperform on the crosses.
In the longer-term picture, they continue to expect the US dollar to decline against the yen and Swiss franc.
