FOMC Preview – March Decision, Projections and Press Conference from Chair Yellen
16 March 2016, 12:15
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Heading into the FOMC’s March rate-decision, market participants are looking past this meeting as FFR futures are only pricing in around a 4% chance of a rate-hike with only 4 out of 97 analysts forecasting a rate-hike in March in the latest BBG poll. Attention will be firmly on the Fed’s updated dot plot projections with most firms stating that they will be revised lower, however, given the difference between the Fed’s projections and what markets are pricing in, several analysts are highlighting that they still may come in much higher than market expectations.
In terms of recent Fed rhetoric, vice chair Fischer stated that the US are not that far away from their inflation target, adding that US unemployment is in the "vicinity of full employment" and that we could have seen the "first stirrings" of higher inflation. Furthermore, during her semi-annual testimony, Fed Chair Yellen demonstrated a more cautious tone saying that “financial strains could impact on outlook if they persist”. However, she went on to suggest that jobs and wage gains are expected to support income and consumer spending. Meanwhile, Fed's Brainard stated that headwinds mean that the rate path is lower than expected.
February and March have seen a strong recovery in equities to reside roughly flat YTD after falling into correction territory in January. This came amid a slew of positive data with the February’s NFP coming in at 242k which is above the Fed’s 200k benchmark alongside the better than expected PCE Deflator (0.2% vs. Exp. 0.0%) and GDP Annualized (1.0% vs. Exp. 0.4%). US Crude Oil prices have also seen a recovery after falling around 25% at the start of the year amid discussions to freeze global supply which bolsters inflation projections. However, Tuesday’s Retail Sales revisions disappointed despite beating on the headline readings.
Several analysts have highlighted that the Fed’s rhetoric will likely be more optimistic in regards to the global economy with most Fed officials stating that they do not forecast a US recession this year. Furthermore, virtually all analysts surveyed, including the most conservative firms such as BNP Paribas, forecast that they will “leave a 25bps hike in June on the table” which comes despite the French bank’s forecast that the Fed will not hike rates this year.
Projections from December:
Fed median Fed Funds Rate seen at 1.40% at 2016-end, at 2.40% 2017-end and at 3.30% 2018-end; Longer run rate forecasts 3.50%.
Estimates 2015 GDP growth 2.1%, unemployment rate at 5.0% and core inflation of 1.3%.
MARKET REACTION
Given the overwhelming consensus that the FOMC are to leave rates unchanged, not hiking is unlikely to cause much of a reaction. Following this, focus will quickly turn to the Fed’s updated dot plot projections, if they come in higher than expected then we could see steepening of the US yield curve, strength in the USD and volatility in US equities as markets assess the relative strength of the US economy. Furthermore, participants will look at the Fed’s rhetoric in regards to whether they keep all of their future meetings “live” alongside comments in regards to putting a potential June rate-hike on the table.
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