FXStreet (Delhi) – We are just a few hours away from the Fed’s first policy meet decision of 2016. Global financial fraternity is going into the FOMC announcement without much expectations and possible chances of dovish tone introduction. The following are the expectations as forecasted by the economists and researchers of 11 major banks along with some thoughts on the future course of Fed’s action. After the recent run of terrible economic releases and global financial chaos, all the 11 major banks are expecting Fed to stay on hold for now with possible second hike coming only in March and beyond.
SocGen
No policy action is expected during the upcoming FOMC meeting but market participants will be looking closely for clues regarding a possible March rate hike. Our central scenario assumes a March increase and a total of three hikes this year. Admittedly, March looks like a close call at the moment given the recent slowdown in activity and tighter financial conditions. The statement is likely to acknowledge these developments, giving it a more dovish tone than the December communiqué. However, the FOMC’s outlook for the labor market and inflation is unlikely to change materially, and we expect the statement to characterize the risks to the outlook as balanced (similar to the September statement). In this context, we think it is premature to throw in the towel on a March rate hike.
ING
FOMC statement could re-insert concerns about global stresses: The Fed could re-insert words of caution similar to those used back in September 2015 when China slowdown fears led it to postpone its anticipated rate hike. Whilst the forthcoming FOMC statement does not provide room for elaborate comments, we imagine the Fed will be pleased with how its policy tools are working to keep the effective fed funds rate within the new target range. Some acknowledgement of this from the Fed is likely in March. And unless there is a strong turnaround in the data soon, the two rate hikes we have pencilled in for June and 4Q16 look in need of a serious trim, whilst the four hikes the Fed implies with its dot diagram look totally unrealistic.
Danske Bank
Focus is likely to be on the statement (no updated projections or a press conference in connection with the meeting). We expect the Fed to be dovish by communicating implicitly that it will skip March and remain patient in the current environment. The main reasons are the weak US data, depressed markets and subdued core inflation. Our current view is that the Fed will increase the Fed funds target rate three times this year (April, September and December) but the downside risks to this call have definitely increased. The Fed will not risk tightening too much, too quickly, in our view. We cannot rule out that we will reconsider our view based on the FOMC statement. Markets have priced in one full hike this year and one next year
RBC CM
The January FOMC meeting will be all about the press statement given no press conference from Yellen or any update to the economic forecasts. As usual, the Fed will make market-to-market tweaks to the section on the economic backdrop. Look for modestly more dovish inflation language on the back of the recent decline in breakevens—the Fed will note that “market-based measures of inflation compensation moved lower” or something similar. Given the recent turmoil in the markets, the committee might also be compelled to insert language similar to that in the September press release when they highlighted potential risks from “recent global economic and financial developments.” We think the market is probably braced for such an addition as well.
Rabobank
We expect the FOMC to keep the target range for the fed funds rate unchanged at 0.25-0.50% on January 26-27. In fact, we do not expect the first hike before June. This month’s meeting does not include an update of the economic projections nor a press conference. Therefore we only have the formal statement to look forward to. The FOMC is likely to acknowledge the substantial slowdown in GDP growth that took place in Q4. While some Fed speakers continue to be complacent, we have our doubts about both the inflation outlook and the pace of the economic recovery, and consequently also about the four rate hikes that the Fed intends to deliver this year.
TDS
TD expects the Fed to stay on the sidelines at the January FOMC meeting as they await confirmation in the incoming economic data that the slowdown in growth and inflation momentum is transitory. Notwithstanding the recent slowdown in economic growth momentum, which should be reflected in a slightly downgraded growth assessment in the statement, the Fed is likely to maintain its hawkish bias. TD expects the next hike in March. The market has moved swiftly in recent weeks, essentially pricing out all but one hike in 2016. As such, any indication from the Fed of their intention to stay the course on tighter monetary policy could potentially result in a dramatic repricing in rates. TD expects the next hike in March.
Deutsche Bank
DB’s Peter Hooper expects the FOMC to take a pass on policy. The primary issue of interest is what sort of message they will send about policy going forward. Because significant data are yet to come before the March 15-16 meeting, the Committee will probably want to leave its options open for another rate hike at that meeting. That said, the news since the December meeting has on balance not been supportive of further tightening any time soon. So they will have the delicate task of acknowledging the recent deterioration in economic and financial conditions while at the same time leaving the door open for a possible interest rate move in March if the recent deterioration proves to have been temporary. If there were a surprise, Hooper thinks it would more likely be on the dovish side – closing the door on March seems more likely than bolstering the message that four hikes are “in the ball park.”
MUFG
Reference to a possible rate increase in March certainly will not be in this evening’s FOMC statement and more likely will be a reference to “monitoring developments abroad”, which was included in the September FOMC statement following the financial market turmoil after the devaluation of the renminbi in August. The FOMC may also cite “recent financial developments” as possibly having an impact on inflation expectations. The financial markets are now even further away from the FOMC DOTS and hence rate expectations already incorporate the Fed shifting its view about there being four rate increases in 2016. So really today will be more about the FOMC merely confirming the facts that have already resulted in the markets lowering rate hike expectations. However, we do still expect the statement to “nevertheless” highlight that the macro-economic situation remains broadly favourable. A perceived dovish statement this evening by the mere acknowledgement of the financial market turmoil since the start of the year may be enough to undermine the US dollar over the short-term.
Nomura
We believe the shortfall in economic data and the tightening of financial conditions are too significant for the FOMC to ignore. We think these unexpected circumstances will be reflected in the FOMC statement in a number of ways. First, we expect the FOMC to note that incoming data suggest economic growth has slowed. Second, we expect the FOMC to suggest that recent declines in oil prices are likely to delay the recovery of inflation back to the FOMC’s 2% target. Third, we expect the FOMC to state that it is monitoring foreign and financial developments, in addition to inflation, as it considers future policy changes. Finally, we expect the FOMC’s forward-looking assessment to acknowledge that the balance of risks has become more adverse. However, we do not think the FOMC will change key policy language or send an explicit signal about the likelihood and/or probable timing of future policy changes. In effect, we think the FOMC will use its assessment of recent developments and the balance of risks to signal how its expectations for policy are evolving, rather than addressing the outlook for policy directly.
RBC
Unsurprisingly, our most dovish listed scenario includes a reintroduction of language, similar to September 2015, that references risks to the inflation outlook from international developments. We see two key risks on the hawkish side – first, the FOMC could opt not to add new language on international developments to the statement, which we call “passively” hawkish. A more “active” hawkish risk would be an introduction of language similar to the October meeting, whereby the Fed attempts to “realign” the (increasingly dovish) market expectation with its own “dot plot” of Fed Funds rate. Interestingly, we see a potential surprise outcome as one where the Fed offers changes that are both hawkish and dovish.
Investec
The FOMC decision could be a key driver of market sentiment. No policy changes are expected, but we will be looking for signs in the Fed’s written statement on whether the US policy normalisation is still on track, in light of recent market volatility.
Click here to read more about the FOMC preview from our in house Chief Analyst Valeria Bednarik titled “FOMC Preview: focus on the statement”
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