US FOMC Preview: 10 Major Banks Expectations
We are closing into the FOMC’s April policy meet decision and the
markets are going into the FOMC announcement without many expectations.
As the clocks tick closer to the decision timing, following are the
expectations as forecasted by the economists and researchers of 10 major
banks along with some thoughts on the future course of Fed’s action.
Most economists and analysts expect the Fed to stand pat at the April FOMC meeting
as they continue to assess the impact on the outlook for growth and
inflation from global events earlier this year. In addition, they expect
that the language of the accompanying communiqué should remain broadly unchanged, reflecting a continuation of the “wait-and-see” policy stance but the big question is whether the Fed will keep the door open for a June rate hike or not?
The apparent slowdown in GDP growth makes an April rate hike by the Fed even less likely than it already was. The minutes of the March meeting revealed that the possibility of an April hike was discussed already. However, recently hawks and centrists have been less vocal about an April hike. We expect the Fed to remain on hold this month, but we stick to our call of two hikes this year, most likely one in June and another in December. However, if the slowdown continues well into Q2 this could delay the first hike of this year to September.
With no press conference, all the focus will be on the tone of the associated statement. The Fed will want to leave the door open for a June hike but it's hard to imagine that they'll dramatically change market pricing for it. The futures contracts have nudged up to pricing a 22% probability of a June hike from as low as 14% mid-way through this month. How much this changes will likely hinge on what extent the Fed continues to acknowledge concerns about global growth and risks abroad. On the positive side the weaker US Dollar should give the Fed some confidence. We think much of the rebound in markets since early February has been due to the Fed's about turn and re-found dovishness. This leaves them trapped in our opinion.
The key event today is the FOMC meeting, which is set to conclude with merely a statement (no press conference or projections). We expect the Fed to maintain the target range at 0.25-0.50% in line with both consensus and market pricing. Although financial stress has eased and China has stabilised, we think the dovish members are likely to maintain a cautious approach and indeed, Fed chair Yellen emphasised downside risks in her last speech. The big question is whether the Fed will keep the door open for a June rise or not: as the pickup in inflation has not 'proved durable' and growth has slowed in Q1, we think it will be too early for the Fed to do so today.
We feel today’s FOMC meeting is too soon for an about face in which the Fed signals a preference for a rate hike at the June meeting. We believe that the Fed could recognize that international risks have diminished, but a hawkish shift today risks losing all the gains achieved since the March meeting (and indeed since the January-February market turbulence): a weaker dollar, an alleviation of pressure for a yuan devaluation, higher equity markets, tighter credit spreads, contained Treasury yields, and generally looser financial conditions. In addition, the optics of the data this week makes a hawkish shift difficult, where GDP will likely show near zero growth for Q1 and the core PCE Deflator is expected to slip back to +1.5% y/y from +1.7% y/y. We do not expect the FOMC to adjust interest rates or make any meaningful changes to its short FOMC statement. More specifically, we think the Fed has little to gain at the moment from trying to “pull forward” market expectations to give themselves optionality at their June meeting. A hawkish signal, in our view, would be difficult ahead of Thursday and Friday’s economic data, which may show GDP growth was likely flat in the first quarter of 2016 and the core PCE deflator edged lower in March.
The odds of this week’s US FOMC meeting delivering a rate hike are zero, according to Bloomberg. The chances of a cut are higher, but only 2%. What matters is the tone of the statement but the Fed has painted itself into a corner. The odds of a June hike are now down at 20% and the FOMC can’t signal a move without triggering market turmoil. A neutral/dovish message may provide a modicum of short-term comfort to markets and hold down the dollar but wouldn’t solve the problem of how to prepare markets for further policy normalisation.
We approach this FOMC meeting (27 April) with a rare sense of certainty as in our view there is no chance of a rate hike. There is even limited scope for the Fed to move markets with text changes. A wary Fed will sustain risk sentiment, yet scope for another dovish shot to the USD is unlikely given the lighter positioning. USD weakness is starting to look overdone and a window of strength may be nearing. This month’s event is a non-press briefing meeting and will not provide any additional materials (FOMC projections, dot diagram, etc). In effect, the text of the statement is all the Fed can tweak and markets may find that they have little to take their cue from.
We expect the Fed to retain a cautious stance towards further monetary tightening at tonight’s FOMC meeting. The Fed may acknowledge that downside risks from global and financial market developments have eased recently and sound less dovish than in March. However, we doubt that the Fed will be confident to signal yet that it is considering raising rates as early as the their next meeting in June. As such we do not expect the Fed to judge that the risks are now balanced/more balanced. The weak start to the year for the US economy will likely keep the Fed cautious about resuming rate hikes in the near-term.
TD expects the Fed to stand pat at the April FOMC meeting as they continue to assess the impact on the outlook for growth and inflation from global events earlier this year. The language of the accompanying communiqué should remain broadly unchanged, reflecting a continuation of the “wait-and-see” policy stance. On the dovish side, one key risk is the potential for the Fed to downgrade the economic growth assessment, reflecting the sustained weakening in domestic economic growth momentum. And while the inflation picture has also softened somewhat, on net, that assessment should remain intact. Even though the Fed will continue to remain data-dependent and keep all options open, we see some risks of a hawkish surprise in which the Fed signals a June/July hike in rates is not out of the question. A reinsertion of a “balanced” or “nearly balanced” risk assessment in the statement will be a significant signal of a shift towards an imminent hike in rates.
We expect the FOMC statement to recognize the improvement in the global conditions that have been an increasing worry for officials over Q1. At the same, time the soft patch of the US economy is undeniable. We suspect the Fed will look past the weakness of the US economy. The strength of the labor market, with weekly initial jobless claims at their lowest level since 1973 and continuing claims at their lowest level since 2000, it is difficult to get too negative the US economy.
Despite vastly improved financial conditions, faded concerns about China, and weaker deflationary pressures amid rising resource prices and a sagging dollar (down 5% on a trade-weighted basis since January’s 13-year high), no one on the planet expects the Fed to lift rates on Wednesday. Here’s what to look for in the press statement to handicap the odds of a June move. If the statement downgrades the assessment of recent economic growth from “moderate” and retains the key phrase: “global economic and financial developments continue to pose risks”, then you can likely sweep June off the table. Instead, if it removes this phrase and qualifies the recent economic slowdown as temporary, then June will remain in play. Additionally, while Kansas City’s George looks to dissent again in favour of higher rates, don’t expect anyone else (notably Cleveland’s Mester) to join her given the recent soft data.