We expect the March meeting to break as follows:
i) The dot plot. DB’s econ team expects the median dots to come down by 25bps for all of 2016, 2017, 2018 and the longer-run. Prima facie this may seem dovish but the dots will have to come down by more than this, especially the 2016 dot, to be seen as genuinely bullish, because the market is pricing in so much less than the Fed projects. The market has less tightening priced in for the end of 2018 than the Dec FOMC median dot for the end of 2016!
ii) The balance of risks. This is where the recovery in domestic and international risk appetite kicks in. Expect this to shift to “risks are nearly balanced”. This is a minimum condition needed to signal that all FOMC meetings (including the April meeting) are ‘live’.
iii) The forecasts: Expect minor adjustments. 2016 median inflation forecasts will likely be revised up 0.1% to reflect recent stronger PCE inflation; and, median growth forecasts revised down 0.2% to 2.2% because of weak international growth. The tone on inflation should be less concerned about a target undershoot, compared to the prior statement that mentioned a ‘current shortfall in inflation’.
iv) The tone of the press conference. Here Janet Yellen will try keep her options open. This also means leaving the door wide open to a June hike, and even ajar to an April hike, on the big provisos that March NFP is strong enough, and global risk appetite holds up. The market will see this as more hawkish than currently discounted.
The above signals should affirm that the Fed remains considerably more hawkish on both the short and longer-term trajectory for fed funds relative to the market. At the margin this is USD positive, even if the market has treated the Fed’s views with some skepticism for many years. This is different from 2015 when the USD ended weaker versus the EUR after every FOMC meeting where there was a press conference.
....While we expect the immediate market reception to the FOMC meeting will be USD positive, the follow through reaction will be very restrained. For one thing, USD bulls have been recently burned. Until the market can see the whites of the eyes of the Fed - which means the market gaining confidence that the Fed will pull the trigger at the next FOMC, whenever that is – USD gains in response to more ‘hawkish’ Fed news will be constrained, and the market’s attention will quickly shift elsewhere. Fed tightening, and US policy rates climbing the G10 ranking table is still key to the long-term USD cycle support, but we are not in the thick of this policy story, yet.
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