In Brief:

 

-No changes to QE/balance sheet policy or the target rate

-No taper announcement but policy statement may be altered to indicate ensuing meetings are ‘live’ for a taper announcement

-SEPs in focus with upward drift to core inflation forecast for 2021/2022, downgrade to 2021 GDP

-Upward drift in Dots may indicate lift-off in 2022 but it seems a very close call;

-2023 dot could also drift higher while inaugural 2024 dot should indicate 3-4 hikes.

-Powell presser to review latest high frequency data/Delta impact; emphasize decision to taper is separate from rate hike considerations

-No changes in IOER/RRP with EFFR steady at 0.08%; no change to the RRP counterparty limit.

 

Street Views:

BoA (Cabana, Meyer): The upcoming FOMC meeting will focus on the guidance for taper, the updated SEP/dots as well as the language used by Chair Powell in the press conference The 2024 forecasts / dots will be released but all eyes will be on the 2022 median dot. “We expect it to be unchanged but there is a risk that it shows half a hike or one hike penciled in. It would take just two participants to revise up their fed funds rate forecast from 0.125% to 0.375% to get the median to 0.25%, and it would take three to push the median all the way up to 0.375%.” “While we see this as a reasonable risk, we ultimately expect that the weakness of the August employment report will be enough to keep enough of the 11 participants who penciled in zero hikes for 2022 in June to remain on hold.” “Meanwhile, we think that the 2023 median will continue to show 2 hikes (0.625%), and the new 2024 dots to show a median of 3 hikes leading the federal funds rate to reach 1.375%. However, the dispersion is likely to be wide for the 2024 dots”

 

Citi: “We see risks skewed as hawkish when the FOMC issues its statement and revised economic projections on Wednesday at 2PM. The Fed will likely guide toward tapering in the coming months and a mid-’22 return to zero net asset purchases. This is by now widely expected in markets and should provoke little market reaction. The hawkish risk comes from the potential for a slightly earlier start to tapering and for upward drift in the policy rate path implied by “dots” as well as core inflation forecasts.” “The 2022 dot will likely show one hike (.375%) as it takes just 3 Fed officials moving dots higher to effect this. From there, most Fed officials will likely assume a pace of two to four rate hikes per year. That would put the lower end of where dots might end up at .875% and 1.375% for 2023 and 2024 respectively. However, in our base case more Fed officials seeing 2023 as a three-hike year would raise the 2024 median to 1.625%.”

 

Danske: Given the weak jobs report and lower-than-anticipated inflation in August, we expect the Fed will refrain from providing more details at this meeting, as the Fed has already made it clear that tapering is set to begin before year-end. We believe the tapering pace is more important than the timing. We continue to expect that tapering will be concluded in mid-2022. We expect the Fed to raise the ‘dots’ by signaling the first rate hike in 2022 (up from 2023 currently). We still expect the first rate hike in H2 2022 in either September or December.

DB: (Luzzetti, Ryan) This week’s FOMC meeting should provide important clues about the Fed’s policy normalization plans over the coming years. In terms of the near-term taper signals, we expect the statement to indicate that a reduction is likely to be appropriate “this year” as long as the economy remains on track. While Powell should maintain optionality about the exact timing of the announcement, we anticipate that the effective message will be that, as long as the economy and labor market do not materially surprise to the downside, the bar to pushing the announcement beyond November is relatively high. The updated SEP will also provide a glimpse at officials’ views on appropriate monetary policy through 2024. While we expect liftoff will remain in 2023, some upward drift in the dots should raise the number of rate hikes that year to three, followed by an additional three increases in 2024. In the SEPs, consistent with softer incoming growth data, we expect that median growth expectations for 2021 will fall by about a percentage point to 6%, and be revised up modestly in 2022 to about 3.5%. The unemployment rate profile should be mostly unchanged except for a slight upward revision to this year, from 4.5% to 4.6%

 

Jefferies: (Markowska, Simons) We expect the FOMC to open the door to a November taper announcement, conditional on a solid September employment gain. With tapering already largely in the price, the new SEP – with forecasts out to 2024 – will be far more interesting. The new economic projections will likely show a smoother growth trajectory (with a slower 2021 but faster 2022), resulting in no net change in the implied output gap or unemployment rate at the end of next year. However, the 2021 inflation forecast will be revised up notably, with 2022-23 forecasts likely to drift higher as well. Will the dots show more hikes? We think so, but not in 2022. This would require at least two Fed officials to move their dots and we see only one – Rosengren – who is likely to do so. Higher inflation forecasts should have no bearing on the timing of liftoff, which is conditioned on a dual test of >2% inflation and maximum employment. So, anyone who switches from no hikes to a hike in 2022 would have to upgrade their labor market forecast, for which we see no justification at this juncture. That said, we do expect the dots to show a steeper tightening trajectory post-liftoff. There is a very good chance that the 2023 median dot shows 3 hikes (up from 2), with 3 additional hikes in 2024. Market rates are currently discounting roughly 5 hikes by the end of 2024. We ultimately expect the Fed to hike 4 times per year starting in early 2023, pushing the funds rate toward the neutral rate by 2025. We expect the dots to begin converging to our scenario next week The taper signal and a steeper dot plot will make for a fairly hawkish combo. Powell will no doubt try to put his usual dovish spin on the outcome of the meeting, by disconnecting tapering from tightening. Will it work? We think so, as long as the 2022 median dot does not lift off. If it does, the argument that tapering does not imply tightening will be more difficult to defend.

 

JPM: (Feroli) We expect the statement to more clearly tee up the November FOMC meeting for an announcement for the start of tapering. Following the adage of “don’t fight the Fed,” we also now look for a November announcement. The other main event next week will likely be the interest rate forecast “dots.” We think the median dot for year-end ’22, will show one hike next year, up from no hikes in the last dot plot this past June. This would appear to justify a sympathetic move up in the ’23 median dot to a cumulative three hikes. Finally, the September meeting is when the Committee rolls the forecast horizon forward a year. We think the ’24 median dot could show another three hikes on top of the three penciled in for the previous two years.

 

GS: (Hatzius) Fed is likely to provide the promised “advanced notice” that tapering is coming; paving the way to announce the start of tapering at the Nov meeting. GS think the statement will say something along the lines of, “The Committee expects to begin reducing the pace of its asset purchases relatively soon, provided that the economy evolves broadly as anticipated”. With start date likely set, GS think pace of tapering is now the open question. They think the Fed will taper at $15b per meeting ($10b UST/$5b MBS) though they think a faster pace of $15b/month that would end the process by mid-2022 is possible. They don’t expect the Fed will reveal the expected pace of taper this week. In SEPs, GS expect the Fed will cut it’s 2021 GDP forecast substantially and will keep the 2022 core PCE projection steady at 2.1%. For Dots, they think it will be a close call as median again shows no hike in 2022 and 2 hikes in 2023; They expect the 2024 dot will show 3 hikes though the means will rise and they expect many participants will pencil 4 hikes in 2024. They would be surprised if Powell now thinks a 2022 hike is appropriate just weeks after arguing in the dovish Jackson Hole that high inflation is likely to be transitory and GS expect most governors at the Board with vote with him. GS acknowledge risk to their focrecast lean in a hawkish direction as some Fed offficials have expressed greater inflation concern. A faster pace of tapering or a 2022 median dot showing a ate hike could be a hawkish surprise.

MS: (Zentner) We expect the Fed to adjust the statement’s language to indicate another step toward tapering – “if the economy evolves broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.” During the press conference, Chair Powell is likely to remind everyone that tapering could be constructed similarly to last cycle, with the flexibility to speed up or slow down/stop should conditions warrant. We still expect a taper announcement at the December meeting of $10bn in Treasuries and $5bn in MBS per meeting, starting in January. The forecast horizon stretches to 2024 at this meeting. We expect the dot plot to show an unchanged median in 2022 at 0.125%, 3 hikes in 2023 at 0.875%, and 3 additional rate hikes to end 2024 at 1.625%. Chair Powell will have ample opportunity to de-emphasize the importance of the dots as a policy signal.

 

NWM: (Cummins) “we expect the policy statement will update the forward guidance on asset purchases—taking another step closer to tapering—by essentially replacing the “in coming meetings” language with “this year”. The new reference regarding timing is a line that both Chair Powell and NY Fed President William have recently used (“Assuming the economy continues to improve, it could be appropriate to start reducing the pace of asset purchases this year.”) In any case, the traditional policy statement will be released at 2:00pm (EST), along with the projections materials (including a new dot plot), and then Chairman Powell’s press conference at 2:30pm.The main takeaways we expect from the FOMC include: Fed’s forward guidance on QE: Taper “this year” (i.e., Nov or Dec meeting); Powell “we are carefully monitoring incoming data” ; Close call but median “dot” to still signal no hikes in ‘22. Dot goes up a bit in ’23; Very little change to statement other than an update on taper “progress”; Projections: Less booming ‘21 GDP. More inflation in ‘21 but slower in ’22.

 

Wrightson: (Crandall) The Fed probably won’t commit to a concrete tapering schedule but is likely to leave the door open to cutbacks as early as November where… The opportunity to taper on the same day that the Treasury launches a sustained cutback in coupon auction sizes may be too good to pass up.” Wrightson on the Fed dots: “The new 2024 dots that will make their debut this week are likely to be well above the levels implied by money market forward rates. We think that quarterly rate hikes in 2024 would be the minimum expectation for most FOMC members, and a number are likely to believe that the Fed will need to make up ground even faster than that.”

SGH Macro: (Tim Duy) Tim thinks this week’s meeting is turning into something of a ‘nail biter’ with the dots being the main source of contention. The general expectation is that this next meeting is too early to announce a tapering decision and he agrees. He thinks the likely outcome of this meeting is guidance that opens the door to tapering at a subsequent meeting. He thinks the consensus at the Fed is circling around the November meeting, the meeting most consistent with guidance from the Fed that is will likely be appropriate to taper this year. He thinks the dots will reveal the median FOMC participant anticipates a rate hike in 2022 & places 70% odds on this outcome. On inflation, the core-PCE inflation forecast for 2021 will be at least 3.7%, a level well above what anyone on the Fed thinks is moderate, and the 2022 forecast, currently 2.1%, will rise to at least 2.2% (He thinks 2.3% but arguably that is an aggressive call), and 2023 will likely still be above 2% as well. That means the inflation surge is almost entirely transitory (in line with the Fed’s story) but with enough persistence to drive underlying inflation moderately above the Fed’s 2% target. This strikes him as a forecast in which the Fed is likely to achieve its objective of 2% average inflation with expectations of continued above target inflation (certainly the new policy framework is sufficiently undefined and flexible to admit such an outcome is likely) in the context of something close to full employment in 2022 and thus a forecast of a rate hike in 2022 would be appropriate policy.

WSJ: Timiraos – “Fed Officials Prepare for November Reduction in Bond Buying” https://www.wsj.com/articles/fed-officials-prepare-for-november-reduction-in-bond-buying11631266200

 

Source: InTouch Capital Markets

 

James Fay Founding Partner T +44(0)20 7422 2978 M +44 (0)7500 988 788 E james.fay@archr.com 49 Carnaby Street, London, W1F 9PY United Kingdom ARCHR.COM

 

 

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