BNPP (out-of-consensus): FOMC To Announce A Dovish Hike; Mkt Short USD Into FOMC
Our economists continue to forecast the Fed delivering a 25bp ‘dovish’ hike,
cushioning its delivery with reassurances about gradual tightening
going forward. However, even a ‘dovish’ hike would show the market that
the Fed are willing to tighten even when very little is priced in and
hence the premium attached to all upcoming meetings would need to
re-price higher. With the market short the USD, we expect to see a significant strengthening of the USD if the Fed delivers. If
the Fed does elect to leave policy unchanged, the USD is likely to take
a leg lower with AUDUSD attempting to test 0.7650 and EURUSD 1.1250.
However, we would expect the accompanying message to keep a December
hike in play (currently priced at 55%%) and hence we would not expect
the USD sell-off to extend too far after the initial adjustment.
Barclays (out-of-consensus): The Time Has Come For A Fed 's Hike
The time has come The long-awaited September FOMC meeting has finally
arrived, and we retain our call for a rate hike on Wednesday. Mixed
economic data last week, including disappointing retail sales amid a
solidifying CPI, coupled with dovish commentary by Board members
Brainard and Tarullo, have reduced market expectations of a hike, with a
20% probability priced in. We see the likelihood of a hike as higher
than market pricing, and there is scope for material USD strength if the
Fed delivers. If the committee instead stays on hold, more hawkish
members will need to be placated with stronger language that points to a
December rate increase. We would expect limited USD potential downside
if this is the case. The market will also pay attention to the FOMC's
Summary of Economic Projections. We foresee a 25-50bp decline to the
appropriate policy path, the ‘‘dot plot’’. We think the median member
sees conditions as likely to support only one hike this year, and the
appropriate policy path is likely to decrease by 25bp in parallel in
2017 and 2018. Given the very shallow rate path already priced in, the
downward revisions should not have a meaningful effect, in our view.
Finally, we expect a 25bp shift down in the long-term fed.
BTMU: No Urgency For A Fed Hike; Downside Risk For USD S/T.
With the probability of a rate hike so low, we fail to see the
urgency in Yellen going in circumstances of causing a disruption to
financial market conditions when we are now within two months of a
presidential election...We also find it hard to envisage a “hawkish
hold” this evening given the DOTS are likely to be cut for this year and
next year and with the long-run fed funds rate probably coming down
from 3.00%. Sure Yellen will signal a December rate hike with one DOT
for 2016, but will the market believe it? We see downside risks for the
dollar over the short-term.
Credit Agricole: No Change; USD Tends To Weaken Post-FOMC But This Time Is Different
We expect no change in policy from the FOMC but we see the
September meeting as setting the stage for a rate increase in December. The
market is going into the event with a 20% chance of a hike priced in -
higher than any of the previous meetings this year but still too low in
absolute terms for the Fed to hike without fearing that the move will
significantly surprise the markets, triggering some undesired volatility
and a tightening in financial conditions. Amid conflicting messages
from Fed officials, our economists argue that while the Fed is closer to
a hike, there is not enough consensus in the committee to move in
September given that there has been relatively little additional
progress on inflation since the July meeting. The USD has weakened after every FOMC meeting this year but we believe this time may be different. Market-implied
probability of a hike by year-end stands at around 55% - a more hawkish
Fed statement should push these expectations higher even acknowledging
the risks surrounding the November presidential elections. Any downward
revision to the terminal Fed funds rate raises questions about the
dollar’s long-term performance but we don’t believe it will hurt the
greenback much in the near-term given the flatness of the front-end of
the US yield curve. That is, near-term hike expectations should
sustainably lift the US 2Y yield, increasing the dollar’s yield
advantage. After a long period of disappointment with bullish USD
strategies market positioning is not particularly long dollars, which
should play into the greenback’s advantage, at least in the near-term.
SocGen: Pricing December Hike With Conviction; USD positive.
The short-term key to yield differentials comes with today’s FOMC
announcement. we think it’s now consensual (a few outliers
notwithstanding) that the FOMC will encourage the market to price in a
December hike with more conviction, which in turn ‘ought’ to underpin US
rates/yields and be at least a little dollar supportive.
Lloyds: On Hold; Dot Plot To Point To December Hike.
Markets currently attach only a 20% probability to a tightening in US
monetary policy at this week’s policy meeting. Of more interest is what
signals are sent about the Fed’s policy intentions for the rest of this
year. Most FOMC members will probably want to indicate markets are
paying insufficient attention to the risk of a rate rise. The ‘dot plot’
of policymakers’ interest rate predictions will likely show the
majority expecting a rate rise in December. The message may be a
tempered, however, by a minority forecast of unchanged interest
rates.The low probability markets place on a near-term rate hike leaves
the risks to the US dollar and Treasury yields tilted to the upside.
Goldman Sachs: Probability Of A Fed Hike Less Than 5%
Later today will bring the much-awaited September FOMC, in something
of a one-two punch of central banks. Our US economists put the chance of
a hike at less than 5 percent, but see the cumulative odds of a hike by
December at 65 percent, basically in line with what interest rate
futures are pricing. As a result, they expect a hawkish pause, with the
“nearly balanced” language perhaps making a comeback. They expect the
dots to show fewer hikes, with the median dot going from two to one for
2016 and from three to two in 2017, i.e. two less hikes through 2018.
However, they expect the long run median dot to remain at three percent.
Credit Suisse: FOMC On Hold; Recent USD Strength Perplexing.
The market and policy context of this latest bout of USD strength is
particularly perplexing as it follows a highly anticipated and
remarkably dovish speech by Fed Governor Brainard ahead of the upcoming
21 September Fed meeting. The unwind of the buildup in hawkish
expectations triggered by the speech had a remarkably short-lived
impact, as it did not prevent US rates from selling off in line with the
rest of G3 (Figure 3). Our US economists expect the Fed to remain at
the upcoming meeting.
BofA Merrill: Fed To Send Conditional Hints Of Upcoming Hike; Mildly USD Positive
The "cautiously hawkish" tone that we expect from the FOMC
meeting is likely to be mildly USD-supportive, but we doubt it is the
start of a new trend. An upbeat economic assessment and
nearly-balanced economic risks would support market pricing for a
December hike, limiting USD downside, in our view. However, with the
market pricing just over one hike between now and end-2017, we believe a
necessary condition for the USD to rally is a consistent pattern of
better US data allowing the market to price a meaningful pace of hikes
in 2017 and 2018. Until then, the USD is likely to be range bound. That
said, a residual expectation for Fed hikes is likely enough to limit
significant USD downside given most G10 central banks are easing, but
the dollar is unlikely to rally either.Additionally, the recent shift by
our US Rates Team's to a short real rates stance also suggests USD
risks are more on the upside than the downside. The USD has benefitted
over the past week as US real yields have risen between 6 and 18 basis
points, driving a steepening of the rates curve. While the USD is
typically negatively correlated with the shape of the yield curve, it
has rallied because the curve steepening has been driven by real yields a
relationship we have highlighted on many occasions. Should a real
rate-led steepening of the curve continue, we would expect the USD to
benefit. Indeed, the dollar continues to look undervalued relative to
real yield differentials as we have noted recently.
RBS: FOMC On Hold; No Strong Directional Conviction
Recent soft economic data has made the FOMC meeting less of an
anticipated event, but the statement, dot plot, and Yellen’s
post-meeting press conference will still be scoured for clues as to how
strong the Fed’s desire is to raise interest rates later this year. Our
baseline scenario for the FOMC decision is consistent with current
market pricing, and thus we do not have strong directional conviction
from that event.
JP Morgan: Next Hike In December; USD Unlikely To Fall On Any Dot Plot Drop.
With respect to the FOMC, we continue to look for the next hike in
December. While recent rhetoric has increased our confidence they won’t
hike in September, it has left our confidence in December unchanged.
Firmer inflation data would obviously make us feel better about that
call. We will also look to next week’s dots for a sense of how the
Committee is feeling about the outlook. In June every participant was
anticipating at least one hike this year. We would not be surprised if
that changes and there were at least one participant next week
anticipating zero hikes. Recall that the dollar has always fallen and
bonds rallied after an FOMC press conference when the Committee lowers
the dots, but the magnitude and duration of those move have always
depended on the global context. In an environment where US activity data
looks stable on average and where most inflation measures are moving
higher, we doubt that another dot drop would weaken the dollar much.
RBC: Relatively Unremarkable; A Dovish Hold
There is a widespread expectation that the outcome of today’s meeting
will be a “hawkish hold”. We think the risk is the tone of the press
conference and revised forecasts fall short of expectations. Our
economists think the statement itself should prove to be relatively
unremarkable, although a modest downward tilt to the characterisation of
the economic backdrop is likely in the offing. They think the dots will
shift lower, reflecting the removal of another hike this year, although
the committee is likely to keep the “optionality” of a 2016 increase
alive. Yellen’s press conference should lean on the dovish side given
the recent bout of soft economic numbers.
ANZ: FOMC On Hold; Dot Plot To Be Revised Down
For the FOMC, expectations are that rates will be kept on hold.
Whilst levels of resource utilisation in the labour market could justify
a rate rise, headline inflation remains significantly below target and
activity readings on the economy have been at best patchy recently.
Central case expectations are that the dot points will be cut by 25bps
and the FOMC will maintain its optionality by leaving one rate hike in
for December. If the FOMC maintains its view of three hikes next year
and in 2018 that would automatically lead to a reduction in the median
estimates of fed funds for those years. Following the disappointing
growth outturn in the first half of this year, there are downside risks
to this year’s growth forecast (currently 2.0%). Forecasts for 2019 will
also be published.
Nomura: FOMC On Hold; Next Hike In December.
We do not expect the FOMC to change policy this week. FOMC
participants continue to stress that their policy decisions are “data
dependent.” The economy’s performance in the first half of the year was
relatively weak. There is some evidence of a pickup in recent months,
but the latest data suggest that activity slowed at the end of the
summer. We think the FOMC will need to see a more sustained acceleration
of economic activity before raising rates again. That said, many FOMC
participants, including Chair Yellen, have argued that “the case for an
increase in the federal funds rate has strengthened in recent months.”
Given these comments, we cannot rule out a rate increase this week.
Based on our forecasts for growth of a little above 2 percent in the
second half of the year, we expect the FOMC to raise its targets for
short-term interest rates in December. The FOMC forecasts for 2016 are
likely to be changed somewhat to reflect the data that have been
released since June. But beyond these basic changes, we do not expect
major changes to the FOMC’s economic forecasts. We expect many FOMC
participants to lower their forecasts for interest rates. A number of
FOMC participants have said that they now expect interest rates to stay
lower for longer. In effect, they have lowered their expected path for
the “neutral” interest rate.
NAB: No Change Expected But Two Dissenters Likely.
The US FOMC announces their rate decision Wednesday along with the
Fed Chair’s press conference and the FOMC’s latest forecasts of growth
and inflation. Given recent speeches by Fed officials, we wouldn’t be
surprised to see two dissenters in a no change decision – those being
George and Mester with Rosengren also a possible dissenter. Despite the
likelihood of dissenters, the majority of the FOMC remain cautious in
changing rates and the recent soft data flow will likely reinforce that
approach. Aside from the decision itself, the focus will be on the Fed’s
latest forecasts for growth, inflation and the Fed Funds rate in their
“dot plots” as well as Fed Chair Yellen’s post-FOMC press conference.
Information received since the
Federal Open Market Committee met in July indicates that the labor
market has continued to strengthen and growth of economic activity has
picked up from the modest pace seen in the first half of this year.
Although the unemployment rate is little changed in recent months, job
gains have been solid, on average. Household spending has been growing
strongly but business fixed investment has remained soft. Inflation has
continued to run below the Committee's 2 percent longer-run objective,
partly reflecting earlier declines in energy prices and in prices of
non-energy imports. Market-based measures of inflation compensation
remain low; most survey-based measures of longer-term inflation
expectations are little changed, on balance, in recent months.
with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with gradual
adjustments in the stance of monetary policy, economic activity will
expand at a moderate pace and labor market conditions will strengthen
somewhat further. Inflation is expected to remain low in the near term,
in part because of earlier declines in energy prices, but to rise to 2
percent over the medium term as the transitory effects of past declines
in energy and import prices dissipate and the labor market strengthens
further. Near-term risks to the economic outlook appear roughly
balanced. The Committee continues to closely monitor inflation
indicators and global economic and financial developments.
this backdrop, the Committee decided to maintain the target range for
the federal funds rate at 1/4 to 1/2 percent. The Committee judges that
the case for an increase in the federal funds rate has strengthened but
decided, for the time being, to wait for further evidence of continued
progress toward its objectives. The stance of monetary policy remains
accommodative, thereby supporting further improvement in labor market
conditions and a return to 2 percent inflation.
In determining the
timing and size of future adjustments to the target range for the
federal funds rate, the Committee will assess realized and expected
economic conditions relative to its objectives of maximum employment and
2 percent inflation. This assessment will take into account a wide
range of information, including measures of labor market conditions,
indicators of inflation pressures and inflation expectations, and
readings on financial and international developments. In light of the
current shortfall of inflation from 2 percent, the Committee will
carefully monitor actual and expected progress toward its inflation
goal. The Committee expects that economic conditions will evolve in a
manner that will warrant only gradual increases in the federal funds
rate; the federal funds rate is likely to remain, for some time, below
levels that are expected to prevail in the longer run. However, the
actual path of the federal funds rate will depend on the economic
outlook as informed by incoming data.
The Committee is maintaining
its existing policy of reinvesting principal payments from its holdings
of agency debt and agency mortgage-backed securities in agency
mortgage-backed securities and of rolling over maturing Treasury
securities at auction, and it anticipates doing so until normalization
of the level of the federal funds rate is well under way. This policy,
by keeping the Committee's holdings of longer-term securities at sizable
levels, should help maintain accommodative financial conditions.
for the FOMC monetary policy action were: Janet L. Yellen, Chair;
William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley
Fischer; Jerome H. Powell; and Daniel K. Tarullo. Voting against the
action were: Esther L. George, Loretta J. Mester, and Eric Rosengren,
each of whom preferred at this meeting to raise the target range for the
federal funds rate to 1/2 to 3/4 percent.
Danske (out of consensus): We Stick To Our Call For No Fed Hikes This Year
Although the more hawkish statement puts pressure on our Fed call, we
stick to our view that the Fed will not hike this year, especially as
we think the Fed may be too optimistic about the current economic
situation given the weakness in ISM and retail sales, but it is a close
call. We have outlined our view in Presentation US: 10 reasons why we
believe the Fed will not hike this year, 14 September. However, incoming
data will be analysed thoroughly in coming months and we may see
markets react more to positive/negative data surprises. Also, in our
view, one should not be fooled about the Fed’s eagerness to hike as the
Fed has communicated an upcoming rate hike the whole year. We still
think most voting FOMC members have a dovish-to-neutral stance on
monetary policy and when it comes right down to it they would rather
postpone the second hike than hike prematurely. It is also worth noting
that three voting hawks (George, Mester, Rosengren) all lose their
voting rights next year. Markets have priced a 60% probability of a hike
Credit Agricole: Fed To Hike In December
The FOMC, as widely expected, opted for unchanged policy at its
September meeting with the Fed funds target range maintained at 0.25% to
0.50%. Market participants saw a relatively low probability for a rate
hike with policymakers split over the near-term rate normalization path.
We look for the FOMC to hike the Fed funds rate by 25 bps on 14-
December. Chair Yellen’s comment that the case for a rate hike has
strengthened was echoed in the statement. Moreover, the FOMC noted that
the “near-term risks to the economic outlook appear roughly balanced.”.
The FOMC wants to “wait for further evidence of continued progress
toward its objectives.” We expect real GDP growth to average over 2.5%
in the second half of the year. As more evidence accumulates that the
economy continues to grow above its potential rate and labor markets
strengthen further with a likely acceleration in wage growth, we believe
that the cautious members of the FOMC will feel more confident about
meeting their policy objectives and raise rates. The FOMC continues to
expect that economic conditions will evolve in a manner that will
warrant only gradual increases in the federal funds rate. The Fed’s
updated dot plot put the median Fed funds projection for yearend 2016 at
0.625% and the projected rate hikes for 2017 were trimmed to 2 from 3.
The longer run rate was moved down to 2.875%.
CIBC: Fed To Hike In December.
A string of weak data releases in the lead up to today's announcement
likely removed any chance of a Fed rate hike. So it comes as no
surprise then that the FOMC decided to keep interest rates unchanged at
their September meeting. That said, with three officials dissenting, it
appears that odds are starting to tilt in favour of a rate hike. The
assessment of the economy contained in the statement appears to be
little changed from the previous one and a sentence indicating that the
case for a rate increase has strengthened was added. Together, those
factors suggest that the recent spate of soft economic releases are
likely viewed as more transitory than not. While the statement and
dissenters argue for more near-term hawkishness from the central bank
than had been expected, the SEP favours a longer-term dovish view of the
economy. The median of members now only sees two rate hikes next year,
while the forecast for the longer-run neutral rate came down a tick to
2.9%. We continue to view December as the most likely timing for the
next rate hike, although that's contingent on a rebound in economic
data. Overall, while the statement and dissents were more hawkish than
expected, the dovishness contained in the SEP appear to be driving
Barclays: The committee More Split Than It Has Been At Any Time In Our Memory
Although we had expected a interest rate hike at this meeting, the
non-hike was very close call. The language in the statement suggests
that the committee was quite undecided in its view. More clearly, with
three members dissenting against the decision and three, presumably
different, members calling for no further rate hikes this year, the
committee is more split than it has been at any time in our memory. This
split in views will make FOMC communication and action increasingly
difficult this year. In particular, we believe that this level of
dissent will make it difficult for the committee to keep the possibility
of December rate hike live in the minds of market participants and,
indeed, households and businesses.
SEB: The Fed Paving The Way For December Hike
As expected the Fed decided to hold the target range for the federal
funds rate unchanged at the policy meeting that concluded today.
Disappointing economic data notwithstanding, the no-hike decision came
with a hawkish twist as policymakers strongly suggested that rates will
be lifted before long. While the case for a rate increase had
strengthened according to the statement, the committee decided for the
time being to wait for further evidence of continued progress towards
its objectives. Every word is there for a reason and “for the time
being” is clearly suggesting that the rate hike is close. The balance of
risk assessment made a comeback too; near-term risks to the outlook now
appear roughly balanced thus also paving the way for a 2016 hike. In
addition to that, the new forecasts show a 2016 hike so all of the above
is suggesting that the December meeting is in the spotlight. Not only
is the election will be out of the way by then but the as opposed to
November the December meeting has a press conference attached to it. The
committee was unusually split with George, Mester and Rosengren
dissenting in favor of a hike while three officials see no rate hike in
2016. What the latter is suggesting, however, is that a huge majority is
expecting a 2016 hike since 17 officials submitted forecasts. As an
aside, if memory serves us correctly not too long ago Rosegren was a
Nordea: Hawkish Signal For December
Today’s FOMC statement and the new dot plot reinforce our expectation
that the Fed will hike rates again in December. We continue to believe
that a Fed move at the next FOMC meeting in early November is rather
unlikely, just one week ahead on the presidential election on 8
November. The renewed downward revision of the Fed’s estimate of the
neutral rate adds to the downside risks surrounding our forecast of 3
Fed rates hikes in 2017.
ANZ: Positive For Risky Assets
The FOMC left interest rates unchanged as expected, but signalled
that one increase in the Fed funds rate was likely by December. Three
voters dissented on the decision to hold rates. Owing to weak growth in
the first half of this year, the 2016 GDP forecast was cut to 1.8% and
the FOMC now anticipates two hikes in 2017. The gradual approach to
raising interest rates and prospect of only modest rises in the future
against the backdrop of moderate growth and well contained inflation
continues to provide a positive framework for risky assets. Accompanied
by exceptionally loose monetary policy in other developed economies,
Asia/Pacific markets should continue to be attractive to overseas
investors especially given the improving growth backdrop in the region.
BofA Merrill: Fed Signals December Hike; Limited USD Downside
The FOMC clearly signaled a hike before the end of the year in both
the language and the dots. The Fed made two important changes to the
statement. First, the committee noted that near-term risks to the
economic outlook "appear roughly balanced". This is an important step
for the Fed to justify hiking rates at an upcoming meeting and is a page
out of the playbook from last year. We expected the Fed to make this
language change. Second, the FOMC noted that "the Committee judges that
the case for an increase in the federal funds rate has strengthened but
decided, for the time being, to wait for further evidence of further
progress toward its objectives." This is a strong signal that the Fed is
planning to hike in an upcoming meeting. It is not explicit calendar
guidance, but it is a small step in that direction. USD: What's Next?
The dollar was mixed in the wake of the FOMC statement. Cross-currents
in the statement between three voters dissenting in favor of hikes
combined risks to the outlook now being seen as nearly balanced were
offset by downward revisions to the 2016-2018 dot plots. On balance, as
we expected, today's meeting set the stage for a December hike, which
will keep the USD supported (and downside limited)..