FXStreet (Delhi) – We are just a few hours away from the Fed’s most important decision in the last decade and the global financial markets are going into the final FOMC announcement of 2015 expecting a rate hike. The following are the expectations as forecasted by the economists and researchers of 16 major banks along with some thoughts on the future course of Fed’s action. After the recent run of strong economic releases, all the 16 major banks are expecting a 25bps rate hike with Yellen’s press conference likely to add some surprise element.
Goldman Sachs
We expect the FOMC to raise its target range for the federal funds rate to 0.25-0.50%, bringing an end to the seven-year period of near-zero interest rates. We expect three main changes. First, we expect the committee to upgrade its description of the labour market in light of firmer payroll growth. Second, we expect the statement to remove some of its relatively cautious language on inflation, while continuing to emphasize that inflation will remain a key determinant of the policy outlook. Third, we look for the statement to show a clear baseline for additional rate hikes—it will not signal “one and done”.
With incoming data broadly cooperating with Fed officials’ outlook we are looking for only modest revisions to the economic projections in the December SEP, although median core inflation forecasts could decline slightly. Chair Yellen’s press conference should offer a cautious message. We expect her to underscore that policy is not on a preset course, and that the subsequent pace of rate hikes will be highly sensitive to incoming information—including economic data as well as financial conditions.
Danske Bank
We expect a dovish hike: We revise down our expectations for the number of Fed hikes. We now expect three hikes in 2016 (previously four) while we still expect four hikes in 2017. We continue to believe that the markets underestimate the number of hikes going forward; thus, there is room for short-term yields to rise. Heading into the Fed meeting this week, we are overweight Europe and underweight the US. This has been our position throughout 2015 and in local currency this has proven to be right. However, if the Fed were to deliver a dovish hike and lead an uptick in EUR/USD to 1.15, we would reconsider our position.
BNPP
The long-awaited Fed rate tightening cycle is expected to begin today with a 25bp hike to the target Fed funds range. We expect Chair Yellen to emphasize in her press conference that the Fed is not on a pre-set course and that FX developments will be among other factors affecting the pace of hikes. The Fed’s expected trajectory of tightening (the “dots”) may shift lower; but even if the median path of rates fell by 25bp it would still imply more tightening in 2016 (75bp) than priced in (50bp). With USD positioning now substantially reduced and the USD trading at more attractive levels vs. key G10 currencies, we think the USD is more likely to gain in the immediate aftermath of Fed tightening.
ING
Rates to go up 25bp – but some anxiety over press conference warranted: It is not usual to go into an FOMC meeting feeling comfortable about the outcome. But markets are as near certain about the first 25bp rate hike in this cycle as is ever the case. The data has been supportive recently, and there has been little, if any, commentary from Fed speakers introducing any sense that this is not already a done deal. But there is still scope for markets to react on the day. As Yellen has been keen to stress in previous meetings, the timing of the first hike is less important than what happens thereafter, so what is likely to be key at this meeting, is the message Yellen delivers about the pace and extent of tightening that is to follow.
SocGen
Our US economics team suggest that having already lowered growth projections and the ‘dots’ showing expectations of the path of Fed Funds going forwards, we are more likely to see the estimate of the longer-term Fed Funds rate edged down (to 3.25% from 3.5%) than any further ‘dot-adjustment’. In a nutshell, we believe that the statement and press conference will play a more prominent role than the Summary of Economic Projections, or the dots in particular. Chair Yellen has to strike a delicate balance between sounding constructive enough on the economy to justify the hike, and yet not sounding so constructive that the market extrapolates a steeper tightening path.
RBS
Our base case is an FOMC “dovish hike” in theory that simply isn’t dovish enough in practice to match expectations in the market. In the near term, we expect the median projection in the dot plot to remain nearly identical to the previous edition published in September. We look for the median dot to hold at 0.38% in 2015 and to remain at 1.38% in 2016 (100bps in hikes, or one at every other FOMC meeting). In this base-case scenario, the trimmed-mean would slip by only around 2 bps in 2016. We think five hikes in 2016 and three hikes in 2017 is consistent with the committee’s expectation of a “gradual path.” However, there seems to be a considerable schism between the FOMC’s definition of a “gradual path” and the market’s. The path we are expecting in the December SEP certainly has the potential to disappoint the latter.
Deutsche Bank
We don’t expect there to be much change to the opening statements on economic developments and prospects. We expect the Fed to continue to sound relatively upbeat on the US economy, reflecting Yellen’s recent speech and testimony although it is possible that we see a subtle change in terminology around the balance of risks on the outlook for economic activity and the labour market from ‘nearly balanced’ to ‘very close to balanced’ which would reflect Yellen’s recent communiqué. Of particular importance will be just how the FOMC chooses to address the gradualism of rate rises. On the forecasts first of all, we don’t expect there to be much change to the FOMC’s median economic projections for real GDP growth, unemployment and inflation.
Rabobank
The FOMC is ready to raise the fed funds target for the first time since June 2006. In her speech on December 2, Fed Chair Yellen said that economic and financial data since the FOMC meeting in October have been consistent with the Committee’s expectations of continued improvement in the labor market, which helps strengthen confidence that inflation will move back to the 2% target over the medium term.
TDS
TD is in line with the consensus in expecting that the Fed will increase the fed funds target range to 0.25%-0.50%. We see a less than a 10% chance that the Fed takes a pass on raising rates at this meeting. The market broadly shares this expectation, with a roughly 80% probability of a hike priced in. As a result, the focus will be on the tone of the Fed’s message and expectations for the timing and magnitude of future hikes. The statement and SEP should be relatively hawkish. The Fed will look to project confidence through better macro forecasts, an ongoing dot plot showing four hikes in 2016 and likely less scope to downgrade longer-term dots than many expect. We expect Yellen’s message in the press conference to be more balanced than the statement as she reinforces the Fed’s caution about the future path for rates, reiterating the “gradual” pace of hikes and the “data dependency” of any policy action. At the same time, she is likely to reiterate that every meeting is “live,” leaving the market feeling underpriced for tightening risks in the first half of 2016.
UOB
We are expecting the Fed’s rate liftoff to take place in the December 2015 FOMC which is also the market consensus. This rate liftoff (if and when it happens) is definitely history in the making after nearly a decade. After the expected first Fed rate hike in the 15-16 Dec 2015 FOMC, we believe the Fed will hike at a slow, gradual pace next year and we keep our rate hike trajectory projection, bringing the FFTR to 0.5% by end-2015 and another four 25bps hike in each quarter to bring the FFTR to 1.5% by end-2016.
Lloyds Bank
Today’s eagerly-anticipated FOMC meeting is expected to produce the first tightening in US monetary policy since 2006. With a 25bp rise largely discounted – despite volatility in equity and commodity markets over recent days – the market focus will be primarily on the FOMC’s signalling about the future path of policy rates. While the Federal Reserve has stressed for some time that the pace of tightening will be very gradual, we expect this message to be reinforced both in Chair Yellen’s press conference, and through the FOMC’s updated ‘dot plot’ of individual interest rate expectations.
BBH
A 25 bp increase in the Fed funds target range to 25-50 bp is widely expected. The near certainty of this contrasts to the high uncertainty of the immediate impact stocks, bonds, and the dollar. There are five components of the Fed’s decision that will command attention. First, the rate move itself which is the most straightforward for the components. Second, the FOMC statement and the economic assessment is unlikely to change much. Part of the statement impact comes from the dissents. Third, the dot-plots–the graphic summary of the Fed’s forecasts as the most important aspect is not so much macro-economic, but indications of the appropriate policy. Fourth, our understanding is that the Fed will also publish a technical note that will provide some operational details. Fifth, Yellen’s press conference where she is expected to emphasize the gradual and limited cycle.
Scotiabank
A 25bps hike to the federal funds target range to 25-50bps as controlled by the FOMC and an upgraded labour market assessment from “the pace of job gains slowed” to something acknowledging two solid gains since the August-September soft patch. A change in the ‘dot plot’ that likely eliminates the negative rate forecast as Minneapolis Fed President Narayana Kocherlakota retires in January and by tradition skips the meeting before in favour of an alternate representative. On its own, this could put marginal upward pressure upon the median forecast for the federal funds rate by FOMC officials.
BMO Capital Markets
We think market expectations for the FOMC are for a hike in the Fed guidance range to 0.25% to 0.50% from the 0.00% to 0.25% range that has prevailed for over six year. A reduction in the forward guidance provided by the ‘dots’ so that the Fed communicates an expectation of 3-4 rate hikes in 2016 instead of 4-5 re-emphasis by Yellen that the Fed won’t follow a programmed course to hike once every quarter. A re-emphasis by Yellen that every meeting is a live meeting and we expect the Fed to try to deliver precisely what the market expects. If there is a surprise, we think it would most likely be a dovish surprise. If a bloc of regional Fed presidents chooses to put in 6+ rate hikes, it is possible that the median dot still ends up implying 4+ rate hikes. This is the hawkish surprise that we think has the highest likelihood. The other potential hawkish surprise is Yellen announcing that the Fed will immediately guide the Fed funds rate to 37-38 bps.
Unicredit
Exactly seven years after slashing its target rate to the zero lower bound, the Federal Reserve will almost certainly announce a 25bp rate hike. This would be the first increase in the short-term interest rate in 9½ years. The Fed will set the interest rate on excess reserves equal to the top of the target range (at 0.50%) and the offering rate for its overnight reverse repo facility equal to the bottom of the target range (0.25%). We anticipate that the FOMC members’ median interest rate projections (the “dots”) for 2017 and 2018 will be lowered by another 25bp each, to reflect the gradual rate hike path.
Investec
The ‘toing’ and’ froing’ is over, the ‘will they’ or ‘wont they’ beginning to subside and we are just a few hours away from the Fed’s last major decision of 2015. We expect the FOMC to lift the Fed funds target range by 25bps to 0.25%-0.50% this evening. This is the overwhelming consensus and is now virtually completely priced into markets. What may move markets more is the tone of the committee’s accompanying statement and remarks relating to the speed of likely increases next year in Janet Yellen’s press conference. On the assumption the Fed will raise interest rates across the pond by 25bp today, the more important issue will be the amount and timing of further hikes in the USA. Unlike previous situations, even a toning down of the Fed’s expected future rate path following a first hike could see the market still needing to catch up pricing in future rate hikes, this means we could well see further US Dollar strength after the whip-saw moves finish and the dust settles in the weeks and months ahead.
Click here to read more about the FOMC preview from our in house Chief Analyst Valeria Bednarik titled “FOMC meeting: is now or never”
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