Wednesday, 17 March, 2021
BoA (Cabana, Meyer): FOMC meeting – the Fed will reflect (1) improved SEP forecasts (2) more upbeat but still patient stance of policy. On net, we expect Fed communications to give a green light to higher rates & belly underperformance. Market focus will be on: SEP & dots, Powell tone, balance sheet, & administered rates: SEP & dots: revised forecasts will tell a more positive story. Fed median real GDP growth estimate in ’21 will rise from 4.2% to 1.5ppt higher or more. Core PCE could be at 2% by end ’22 & overshooting in ’23. The dots will likely show median expectations for a hike in ’23 and some officials calling for hikes in ’22. Better forecasts = Fed inching closer to accommodation withdrawal. A median ’23 dot showing one hike will still be well below the market, which expects nearly 3 hikes by that time. The market will likely focus more on the Fed shift in tone and signal for less accommodative policy; this would allow for a further re-pricing of Fed hikes. Should the median dots reflect no rate hike through 2023, this will be the first time since 2013 when the market prices a more aggressive policy path than the dot plot. Generally, we find that the Fed tends to come towards to market. When the market prices a materially more accommodative path relative to the SEP, price action following the meeting suggests a more dovish tone. We see the opposite price response when the market is more aggressive than the SEP. We expect no Fed balance sheet changes at the March FOMC but look for a nod to market functioning issues. It is possible FOMC statement language is adjusted to suggest asset purchase flexibility to ensure smooth functioning markets in light of recent pockets of UST market illiquidity.
BMO (Gregory) We don’t expect the FOMC to alter the fed funds target range or the pace of asset purchases, nor the forward guidance on both fronts. Most of the market’s focus will probably be on the Summary of Economic Projections (SEP). In December’s SEP, the median forecast for 2021 was real GDP growth at 4.2% (Q4/Q4), a 5.0% jobless rate (Q4), along with both total and core PCE inflation at 1.8% (Q4/Q4). This forecast is ripe for upgrade; we’re talking stronger growth, lower joblessness and faster inflation. 2021’s stellar performance will likely still create better results by 2023 than those described in December’s SEP. That is, more cumulative growth over the three years (vs. 10.1% before) along with a lower ending jobless rate (vs. 3.7%) and higher ending inflation rates (vs. 2.0%). The better median results will mirror numerous shifts in participants’ individual forecasts, which, when it comes to the policy rate calls, are probably going to be moving lots of dots in the plot. We look for the new median to reflect at least one rate hike by 2023-end, with the dots’ distribution indicating that more moves could emerge in subsequent SEPs
Citi: The FOMC meeting is the first chance after the recent sell-off for Fed officials to document their expectations for Fed funds relative to market expectations. It is a measure of the rapid change in circumstances that the Fed could even be contemplating changes to projections from December when the vaccines had just been announced amidst a surge in COVID cases, to the present situation with significantly more vaccine availability and two stimulus packages passed in the interim totaling nearly $3tn. We expect to see some participants move dots higher, especially for 2023, although the median could stay at zero. Chair Powell has been non-committal about the market implied full lift off by early 2023 but has emphasized that he wants to see actual progress, not expected progress towards the inflation mandate and more importantly, employment goal. Harker has explicitly said he’s not looking for a hike anytime in 2022. Overall, we think that the fed funds projections would be dovish relative to fed funds pricing and the messaging from Powell is likely to be non-committal with regards to lift-off timing but reiterating a dovish guidance based on actual progress towards the employment goal.
Jefferies: (Markowska, Simons) How will the FOMC internalize the extra $1.9tn in fiscal stimulus? In the December SEP, the FOMC projected 4.2% growth this year and 3.2% next year, bringing inflation to 2% by the end of 2023 and liftoff in 2024. (The latter was not shown explicitly in the SEP, but strongly implied.) Assuming they raise GDP forecasts for the next two years to about 6% and 4% respectively, this should push the unemployment rate below the natural rate by 2H’22, which means that the 2% inflation forecast is likely to be pulled forward to YE’22. Will the dots move as well? We believe so and think there’s a good chance that the median 2023 dot rises to 0.375%. As of December, there were 5 dots indicating 2023 liftoff, with 12 dots holding steady. So, we need just 4 individuals to lift their dots in order to move the median. We think that’s a reasonable assumption, for three reasons:
1. Given the magnitude of the likely forecast revisions, it would be hard to justify no change in the policy outlook. Not doing so would be inconsistent with data dependency and would strongly suggest that the Fed is calendar dependent (which the Fed insists it isn’t.)
2. The Fed has not pushed back against the recent repricing of rate expectations, which is an implicit endorsement of what’s already priced in.
3. Since the rates market has already discounted 3 hikes in 2023, this is a great opportunity for the Fed to mark to market its rate forecast without causing undue market volatility
JPM: (Feroli) main event for next week’s FOMC meeting should be the interest rate forecast “dots.” While it’s a close call, we think the median dot for 2023 will show one hike, up from no hikes in the last projection from December. This will likely be accompanied by a material upward revision to the growth outlook, and a much smaller upward revision to the inflation outlook. We expect the revised activity forecasts will look similar to ours, with the median participant’s expectation for GDP growth this year north of 6%, pushing the unemployment rate below 5% by year end. The statement should be revised to reflect the better employment and spending news since late January, but we believe it will retain its overall cautious posture toward the outlook. We don’t expect any news, in either the statement or Powell’s prepared remarks, about the path toward tapering. (We can’t say the same about the minutes to next week’s meeting). We don’t expect a technical adjustment to the interest on excess reserve (IOER) rate. We wouldn’t rule out learning anything about the supplementary leverage ratio (SLR) next Wednesday, but we think it’s much more likely that any announcement is made on a non-FOMC day.
GS (Mericle) Since the FOMC last wrote down projections in December 2020, the biggest surprise has been that Democrats won the Senate, passed the $1.9tn American Rescue Plan Act, and are now likely to pass further fiscal measures including infrastructure spending, an extension of the child tax credit, and an extension of expanded unemployment insurance eligibility and benefit duration through 2022. The results indicated that the FOMC’s GDP growth and unemployment rate forecasts require major upgrades, and we expect that analysis provided by the Fed staff will convince participants to make them. Specifically, we expect the median participant to forecast growth of 6.2% in 2021 on a Q4/Q4 basis, a 2pp upgrade from December, but well below our own 8% forecast, We likewise expect the median participant to show a lower path for the unemployment rate of 4.4% / 3.7% / 3.3% in Q4 of 2021-2023, though above our own forecast of 4% / 3.5% / 3.2%. This should translate to a higher inflation path, and we expect the core PCE projections to rise 0.1pp to 1.9% / 2% / 2.1% over 2021-2023. Finally, we expect the median dot to show one hike in 2023 instead of the flat path shown in December. We expect 11 participants to show at least one hike in 2023 versus 7 showing no hikes (Christopher Waller has joined the Board of Governors, raising the number of submissions to 18). Of those showing at least one hike, we expect most to show just one, but a handful to show two or more.
Nomura: (Alexander) We do not expect any substantive changes to the Fed’s core policies – including forward guidance and asset purchases – at the March FOMC meeting. Additional fiscal stimulus and moderating new COVID-19 cases should strengthen the Fed’s near-term outlook. However, we believe a stronger economic outlook – including a slightly higher inflation trajectory – will result in the median “dot” in 2023 showing one rate hike. We do not expect a policy reaction from the FOMC with respect to ongoing volatility in the Treasury market. Chair Powell will likely highlight the Fed’s current forward guidance and flexible average inflation targeting (FAIT) for short-term rates in order to push back on current market liftoff pricing. We expect Powell to reiterate that recent increases in long-term rates likely reflect increased optimism over the recovery, but that persistent signs of market illiquidity bear monitoring. We do not expect major changes to the post-meeting statement aside from an acknowledgement that recent data suggest stronger economic activity. We continue to expect asset purchase tapering to begin in early 2022 and liftoff in Q3 2023.
NWM: (Cummins) the upcoming FOMC statement will likely acknowledge some of the surprisingly encouraging signs in the economic data since the January FOMC meeting, but it is also likely Chair Powell continues to emphasize that the labor market is still a very long way from normal and low inflation prospects will justify a low nominal funds for a long time to come. The bar is not high to change the 2023 median dot. In March it will “only” take four new forecasts for the median to show a hike in 2023 (in addition to the other five members who already showed a hike in the last round of dots in December). Our base case is that most officials will stay conservative in their submission of the funds rate at this point in the recovery and will not show a hike in 2023. A small upward adjustment to the 2023 dot this quarter could muddy the FOMC’s message, and present challenges to the Fed’s communications efforts going forward. On SLR, we don’t think an announcement has to come in the context of the FOMC, especially given that the decision will most likely involve the FDIC and OCC as well. If anything, we could see the Fed perhaps wanting to separate this announcement from an event that is usually focused on monetary policy. That being said, Powell will almost certainly be asked about it at the press conference. Assuming we haven’t had an announcement before then, NWM would expect him to punt and say a decision will be coming shortly. As such, NWM see any day between now and the end of this week as “live”.
Wrightson: (Crandall) We don’t expect Chair Powell to make any waves in Wednesday’s press conference. His basic message won’t change from his closing arguments prior to the beginning of the blackout period ten days ago. ON RRP/IORB Tweaks. No adjustments in the Fed’s administered rates are likely. As discussed last week, the technical argument in favor of tweaking the RRP and IORB rates has not gelled as quickly as we expected, and the communications challenges have grown. ON RRP Counterparty Limits. With activity levels in the domestic overnight RRP facility likely to soar in the months ahead, there is a good chance that the Fed will need to relax the per-counterparty limit on individual awards at some point. However, there is no need for the FOMC to raise that limit preemptively. SEPs: we expect the Fed’s economic projections to be more optimistic than in December – on balance. The median projection for GDP growth in 2021 is likely to be closer to 6% than December’s 4.2% figure. However, the median estimate for 2021 Q4/Q4 core PCE inflation may not rise much from last quarter’s median projection of 1.8%. Since inflation trends will play a dominant role in the debate over the timing of the first rate hike, the expected macro forecast configuration suggests that the policy forecasts in the dot plot will drift up a little but not a lot. We expect the number of FOMC members penciling in rate hikes by 2023 to rise to six or seven this quarter versus five in December, but that would still leave the median forecast unchanged at 0.125% for 2023.
SGH Macro: (Tim Duy) “The Fed will likely not signal a 2023 rate hike at this week’s meeting. Doing so would call into question the Fed’s commitment to the new policy framework. Within that framework, there really is no point to forecasting a rate hike before inflation comes close to 2%, let alone the current situation. It would begin the rate hike discussion before the tapering discussion. If a rate hike appears in the 2023 dots, Powell will have his work cut out for him in this week’s press conference
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