We are just a few hours away from the Fed’s March policy meet decision. Global financial fraternity is going into the FOMC announcement without much expectations and possible chances of a lower Fed Funds ‘dot-plot’ is also expected. The following are the expectations as forecasted by the economists and researchers of 17 major banks along with some thoughts on the future course of Fed’s action. Surprisingly, all the 17 banks do not think that FOMC is ready to raise rates today even as the financial conditions have eased considerably over the last month, and incoming data have held up reasonably well with possible second hike coming only in June and beyond.
Goldman Sachs
Although policymakers continue to express some caution about the outlook, financial conditions have eased considerably over the last month, and incoming data have held up reasonably well. We do not think the committee is ready to raise rates today, but expect the statement to say that risks are “nearly balanced”. Guidance from the meeting in general should indicate that another rate hike is likely before too long—we expect an increase at the June 14-15 FOMC meeting, but action at the April 26-27 meeting is not inconceivable. In the Summary of Economic Projections (SEP), we look for: (1) a small reduction in GDP growth projections for 2016 and possibly for the longer-run; (2) a one-tenth increase in core inflation for 2016, to +1.7% Q4/Q4; and (3) a 25bp reduction in the median funds rate projection for 2016-2018, as well as for the longer-run. Beyond meeting, we think markets may be underestimating Fed officials’ tolerance for tighter financial conditions over time. In fact, we expect that financial conditions will need to tighten moderately over the next year to bring employment growth to a trend pace, which probably requires a steeper funds rate path than currently priced in the bond market.
Nomura
Given the still elevated uncertainty about the outlook we do not expect the FOMC to change policy at next week’s meeting. Recent commentary from Fed officials does not suggest that a change is imminent. The more interesting question will be how the FOMC’s forecast for the economy and interest rates change. Given the resilience of the economy and the recovery in financial conditions, we do not expect significant changes in the economic forecasts. However, we do expect a lowering of interest rate forecasts – we expect the median for 2016 and 2017 to fall by 25bp. We do not expect Chair Yellen to send a strong signal about upcoming policy decisions, but rather to stick to the themes of the FOMC statement – i.e., that the economy is on track, the Committee is monitoring financial and foreign developments, that it expects to raise rate gradually, but future decisions will depend on how the economy and inflation evolve.”
ING
We don’t think the improvement is longstanding enough for the Fed to consider a rate hike just yet. A further easing of financial conditions is desirable. Despite the significantly better run of data of late, there are a number of reasons why we think it is still too early for the Fed to hike this month; perhaps the biggest is the sharp spike in US financial conditions. While conditions have eased since the Jan FOMC meeting, we suspect that the Fed will be wary of foiling any recovery. We see scope for short-term US rates to push slightly higher as a split FOMC will net out to three 2016 rate hikes remaining in the dot diagram (which is significantly above the current market pricing of just one hike this year). While “stirring” signs of inflation will be viewed in a positive light, we think that the dovishly inclined Chair Yellen will look to convey a fairly neutral tone.
Deutsche Bank
Our US economics team expect the Fed to remain on hold, but to nonetheless re-introduce their “balance of risks” language in the post-meeting statement, thereby leaving open the possibility of a rate hike as soon as the June 14-15 meeting. Overall, they expect the statement will strike a cautiously optimistic tone given the stabilisation in domestic and international equity markets (up about 9% from their intra-quarter low). On the domestic economic assessment, they think the language may look very similar to January. Always a highlight for market observers: the “dot plot”. Here, our US team think that the forecast may be reduced by just 25 basis points compared to the median expectation from the December 2015 meeting of four rate hikes this year.
MUFG
FOMC is expected to remain on hold and cut the Fed Funds DOTS profile by at least 25bps to a median level of 1.125%, implying three rather than four 25bp rate increases through the remainder of 2016. Fed Chair Yellen will have to provide reasoning for this in her press conference following the announcement. The statement on Wednesday and Fed Chair Yellen in her comments will acknowledge improvements and will therefore conclude that conditions are again falling into place for a resumption in rate hikes. One clear way for that to be signalled in the statement would be for the balance of risks bias, which was dropped in January, to be reinstated with the FOMC concluding that the balance of risks have returned to “nearly balanced”, or perhaps even fully balanced.
SocGen
January’s market sell-off means that only 4 of the 98 (brave) respondents to the Bloomberg survey look for a hike today, but while a lower Fed Funds ‘dot-plot’ is also expected, most expect the new median dot-path to be above what is priced into the OIS curve as the FOMC is less downbeat about the global environment and references the tightening labour market and slow build-up of inflationary pressures. All of which should be dollar-friendly as long as a mildly, hawkish sentiment doesn’t send global risk sentiment into a tailspin.
Commerzbank
Fed is unlikely to hike interest rates. Otherwise, it would have prepared markets already. After all, the Fed will certainly not want to jeopardize recent days’ signs of calming on financial markets with a surprise rate move. Medium-term, further interest rate hikes must be expected though as progress towards the Fed’s targets is evident from the data. Job creation even accelerated again in February. And the Fed is also likely to have been pleased by the rise in the participation rate. Moreover, recent price data also show an increase in core inflation, implying that it is no longer too far off the 2% target. In spite of all disturbing factors, the US economy is thus moving in the desired direction. The Fed statement due for release after the meeting should also reflect this. Moreover, the Fed will publish updated FOMC projections. With inflation markedly on the rise recently, expected core inflation (currently +1.6% by end-2016) is likely to be revised upward. As the Fed is likely to pause in March – probably in contrast to earlier plans – the FOMC members are likely to expect less interest rate hikes than in December. We are looking for three steps to be featured into the dot plot each in 2016 and 2017. This would imply two steps less than before but still a lot more than priced into the market.
Rabobank
We should not expect a rate hike, but we may see a consensus forming by the June meeting. We stick to our call of two hikes this year, most likely one in June and another in December. Note that markets are now pricing in one hike this year, in June. However, this is only a recent insight as a few weeks ago they were not pricing in any rate hike this year. At the same time, as wage pressures remain subdued, we do not think that the Fed will deliver the four hikes implied by the December dot plot. In fact, we may see a downward revision to three hikes in the dot plot today.
Lloyds Bank
The March FOMC meeting is unlikely to see a change in US monetary policy. However, the Fed will signal that interest rate hikes remain on the cards later this year. The FOMC will use its press statement, Fed Chair Yellen’s post-meeting press conference and its forecast updates to indicate its intentions. How many interest rate rises are forecast by FOMC participants for this year, the so-called ‘dot plot,’ will be watched particularly closely. We expect this to signal at least two interest rate rises of 0.25% for 2016. The probability that markets place on a mid-year interest rate hike is likely to continue to rise over coming months.
Danske Bank
We expect the Fed to keep the Fed funds target rate unchanged at 0.25-0.50% at today’s FOMC meeting. As this is widely expected, focus should quickly shift towards the updated projections for the Fed funds target rate (the so-called ‘dots’). We expect the Fed to signal two or three hikes this year (down from four) and four hikes next year (unchanged). The Fed wants to keep the door open for a June hike. Our main scenario is that the Fed will stay on hold until September but the probability of a move in June and that the Fed will tighten monetary policy more than once in 2016 has increased due to the rebound in risk sentiment, continued improvement in the labour market and higher PCE core inflation. Markets have repriced the Fed and now expect two and half hikes by December 2017.
BNZ
In recent weeks, as US data has been less disappointing and market volatility abated, the market has renewed expectations for further Fed action this year. It assigns virtually no chance to a hike this week, but prices almost an 80% chance of a 25bps hike by year-end. Given how far expectations have moved in recent weeks we do not expect the market will be too surprised if the Fed sounds committed to further rate hikes. We anticipate the Fed may deliver 50bps of hikes before year-end and expect further stabilisation in the global oil price.
NAB
While the markets are not expecting any change in US rates, our rate strategists suspect the Fed may not be as dovish as markets currently expect, with pricing continuing to reflect just over one rate hike before the end of the year and only around two thirds of a chance of a hike by June.
TDS
TD is aligned with the market consensus in expecting the Fed to leave its fed funds rate unchanged. The accompanying statement is expected to acknowledge that additional market turmoil would increase the downside risks shrouding the outlook, but ultimately conclude that the recovery remains on track. This mixed message will disappoint those who expect that the Fed will not hike in 2016, but stop short of giving any indication of when the next move will occur. The dot plot for 2016 is expected to shift lower to show three rate hikes, which when combined with referencing downside risks, will be interpreted as modestly dovish. The overall tone of the March FOMC meeting should be mixed, reflecting a Fed that is comfortable enough with the recent easing in financial conditions to reassert its tightening bias. Nevertheless, with global growth uncertainties continuing to linger, the tone is likely to remain cautious. TD’s base-case is for the median 2016 dot to shift lower to three hikes from four, while the risk assessment should signal a slight dovish leaning. This will keep a June hike alive. On the hawkish outcome, the Fed could play up the recent firming in inflation as they set the stage for an April hike. Conversely, an explicit mention of “downside risks” in the statement and a downshift in the 2016 hike projection for the Fed’s core members will be seen as quite dovish. Yellen is likely to strike a balanced to slight dovish tone in the press conference. Particularly, she is likely to highlight the risks to the outlook from lingering global growth uncertainties.
Investec
After the London close we have the FOMC interest rate decision at 18:00 (due to clock changes) where we and the market are expecting no change. However, Fed Chair Janet Yellen’s accompanying press conference at 18:30 is likely to indicate that the hiking bias remains and the door is open for a ‘data dependant’ summer hike. If Yellen takes a dovish stance, highlighting concerns from recent slowdown in Chinese and Emerging Markets (EM) economies and Commodities market weakness, the US Dollar could be in for a rough ride. Financial markets are currently expecting a 54% probability of a June hike (up from 2% at the lows last month).
BMO Capital Markets
We look for the statement to sport at least a “nearly balanced” risk assessment and for Chair Yellen, in the subsequent press conference, to assert that the normalization process continues (our call is for a rate hike in June followed by December). Between the statement and the presser, we expect the recent up-drift in both core CPI and PCE inflation to be portrayed as the stuff that builds Fed confidence, along with continued solid job creation. Also, we’re expecting to see some meaningful changes to the “dot plot”. December’s median projection called for 100 basis points of tightening in 2016 with a year-end level of 1.375% (15 of 17 participants favoured lift-off), 100 basis points in 2017 to 2.375%, 87½ basis points in 2018 to 3.25%, and a final 25 basis points in the “longer run” to 3.50%. We judge March’s median projection will reveal a lower level for policy rates along the entire profile, owing to fewer projected rate hikes this year and the tenuousness of the 2018 and longer run results. We look for the new median to call for 75 basis points of tightening in 2016 with a year-end level of 1.125%, but still 100 basis points in 2017 to 2.125% (putting both our calls 25 bps below the FOMC’s). For 2018 and the longer run, it will only take one participant (whose forecast is at the median) to lower theirs a notch. If, as we suspect, the new longer-run median becomes 3.25%, this means the FOMC’s projection will have fallen a full 100 basis points since the first projections were published in early 2012. This is a huge judgement change about longer-run U.S. growth and inflation prospects, which no doubt makes the market much more comfortable about pricing things “below the dots.”
BBVA
March FOMC meeting will provide some significant details on the future of Fed policy. While we do not expect another rate increase this month, we are likely to see some changes in the FOMC’s economic projections. In particular, the Committee is likely to revise down their projected path of interest rates – probably to just three instead of four rate increases in 2016. Furthermore, Chair Yellen’s press conference will likely touch on the latest developments in global financial markets and how much the ongoing volatility has really impacted the Fed’s outlook. She is also likely to provide some commentary on other lingering concerns such as inflation and negative interest rates.
BBH
The market attributes practically no chance for a Fed hike today. But the FOMC is expected not to back off very much from its view that contrary to what some have argued, the December rate hike was not a mistake and that the economy is still on track to allow the Fed to hike rates this year. The four hikes seen in the dot plots in December will be reduced. Many expect only two hikes, but we suspect the Fed will retain three. By waiting for June, Yellen would increase the chances of another unanimous vote. Look for the Fed’s growing confidence to be expressed in a nearly balanced risk assessment.
Click here to read more about the FOMC preview from our in house Chief Analyst Valeria Bednarik titled “FOMC meeting: looking for clues on upcoming rate hikes”
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