Wednesday, 26 September, 2018
‘We believe the message will remain the same, ie, the economy is doing very well and gradually raising short rates is the best way to sustain the expansion. We believe the updated SEP is likely to show a similar economic backdrop of above-trend growth with only modest changes to the projections. The median “dots” are likely to remain unchanged, with a risk of a move higher in the dots for 2019/20. Still, the long-run projections may not move higher, due to the inclusion of Vice Chair Clarida’s dot. The Fed will also be extending the SEP to 2021, which is likely to show a convergence toward long-run projections. ‘
Expect the Fed will lift the ‘target range for the fed funds rate to 2.00%-to-2.25% and the midpoint (2.125%) unequivocally above core PCE inflation (currently 2.0% y/y) for the first time since March 2008. This marks a critical juncture in the Fed’s policy normalization process. Up to this point, the objective has been to shift policy rates from zero nominal to zero real; now, it is to shift them from zero real to neutral real—an objective shrouded with ambiguity because the level of the longer-run neutral real policy rate and the optimal path to get there are uncertain.’ BMO the statement may signal the need for policy to potentially ‘become more nimble when it comes to rate hikes compared to the current workmanlike (quarterly) pace.’
Do not think it is necessary for the Fed to send any new important signals to the markets. They believe the most important parts of the statement will remain unchanged and even if the sentence ‘monetary policy is accommodative’ is removed or changed, it should not matter much, in their view, as it would just reflect reality. Regarding the dots, the Fed will most likely still signal another hike in December (and probably that more FOMC members support this) and three hikes next year (it was divided between two or three additional hikes next year and it would take four members to move it higher). The Fed will also still signal that it is going to raise the Fed funds rate above the longer-run dot. The longer-run dot may be revised higher to 3.00%.
“With Inflation at target, the unemployment rate is below target and falling, and yet the funds rate remains 100bp below the Fed’s estimate of its neutral level. Most FOMC participants now agree that this makes little sense—the Fed has some catching up to do.” GS do not expect major changes to the statement and think the description of the policy stance as “accommodative” a touch more likely than not to remain. Changes to the economic projections should be minimal, with 2018 growth bumped up a bit. The median interest rate path is likely to remain unchanged, but we expect a firmer consensus around 4 hikes in 2018, 3 in 2019, and 1 in 2020. The new 2021 projections will offer insight into the Fed’s plan to manage the overshoot of its labor market target. They expect a flat terminal funds rate of 3.25-3.5% and a slight uptick in the unemployment rate as the restrictive policy stance does its work. Finally, they expect the median neutral rate dot to move up slightly to 3%, although this is uncertain and partly driven by changes in the composition of the committee.
MS expect the FOMC to: Raise the federal funds rate target range by 25bp, to 2.00-2.25%. Remove or alter the "accommodative" language while showing a solid consensus around 4 hikes in 2018. Risks to the outlook will remain balanced as upside risk from easy financial conditions is countered by downside risk from foreign developments and trade policy. Make little change to its SEPs beyond 2018, as well as the "dot plot." Policy becomes more difficult as the FOMC is now in the range of neutral and downside risks have risen. The state of trade policy is in flux, and the announcement of tariffs likely comes too late for the broader FOMC to onboard its impact into the outlook. The message from this meeting will be continued gradual hikes, with a watchful eye toward risks—to both the upside and downside. MS continue to look for an end to the hiking cycle in June 2019.
Expects the Fed to increase the funds target range by 25bp next week, while dropping the reference in the statement to policy being “accommodative.” Recently the effective fed funds rate has been trading at about 8bp below the upper end of the target range. JPM believe the evidence over the past year is that this is still comfortably enough within the range that they will not see the need to lower IOER within the target range (a gap of 5bp or lower would appear to be the trigger for such action, based on an admittedly limited sample size). Accordingly, JPM look for the IOER rate to be increased by 25bp to 2.20%. JPM also expect the median dots for 2019 and 2020 to continue to show 3 hikes, and 1 hike, respectively. They think the new 2021 median dot will show 3.375%, while the longer-run dot should remain unchanged or drift up to 3.0%, Though the dots indicate the Fed funds rate moving into restrictive territory by 2020, they do not expect Chair Powell to push any strong views.
With another rate hike, Jefferies expects the third paragraph of the policy statement to continue to describe monetary policy as remaining “accommodative” but modify the wording to convey the message that policy is becoming gradually less accommodative. This will acknowledge the effect of prior rate hikes but also leave the door open for future gradual rate hikes in the fed funds rate. In the SEPs, they expect: important changes to the SEP as follows: the Fed will raise median growth projections for 2018 and 2019 and “Longer run”. Raise the median Longer Run (AKA neutral) fed funds rate to 3% from 2.9%. Project six more rate hikes before the fed funds rate peak is achieved. The biggest issue is whether or not there are four rate hikes in 2019 and two rate hikes in 2020, or three rate hikes in 2019 and three rate hikes in 2020. – The SEP will include projections for 2021 for the first time. – The SEP 2021 will project growth and inflation each at 2%, with the fed funds rate steady at the longer run neutral rate.
On balance, they expect the Fed statement, the Chairman’s press conference, and the FOMC “dot plot” to signal further gradual rate hikes ahead (including December). More important is what happens with policy once rates reach the neutral level. NWM expect little clarity with respect to that question at this time however. They expect no meaningful changes to the FOMC statement. The characterization of the economy should remain upbeat, as the labor market continues to strengthen andreal GDP growth appears to be holding up well after advancing in Q2 at a healthy 4.2% clip. They expect risks to the economic outlook to again be characterized as “roughly balanced.” The Fed could acknowledge the potential impact of Hurricane
Florence (which is likely to affect the data for September — including payrolls, given the hurricane hit during the employment survey reference week), though the longer-term impact is likely to be downplayed. Importantly, given that the funds rate will still be below participants’ views of the long-run neutral rate after the September hike, they expect the FOMC to again indicate that "The stance of monetary policy remains accommodative." They do not expect the median estimates for year-end 2018, 2019, or 2020 to shift. For 2018, they think a large majority will see another rate hike in December as appropriate.
Given the recent repricing in rates markets, Nomura suspects the Fed is pleased that markets already seemed to have discounted a lot of Fed hikes ahead. As such, Nomura’s base case would see this meeting bringing only very minor changes in the SEP forecast and largely unchanged annual dots. Their economists expect that the long-run dot moves towards 3% and that the easiest thing for the Fed to do with the 2021 dots is to make them the same as the 2020 forecast. A minor dovish signal would be the removal of “remains accommodative” but it’s possible it saves that for Dec. Nomura also don’t expect any adjustments to the IOER rate (which is largely not priced-in either).
Expect and a few more Fed officials should signal their comfort with four rates hikes for this year in the dot plot. The 2020 and 2021 dots will continue to show a sizable majority supports hiking beyond neutral, while the median longer-run dot could drift down to 2.75% thanks to newly added participants. This then raises the odds that the statement language is modified to suggest “policy remains somewhat accommodative.” Risks should remain balanced, with Chair Powell potentially de-emphasizing some of the downside risks that have preoccupied markets of late. The September hike is well priced in and the market is pricing in more than an 80% chance of a December hike and about 2 hikes next year. Given recent price action, their base case scenario for the Fed should result in a modest bull steepening reaction. Note that the market is not pricing in hikes beyond neutral, which could make it vulnerable to a bear flattener if the Fed stresses on overshooting neutral
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