FOMC Preview: Dashboards, Dissent, & "Degree-Of-Accommodation" Differences
"More of the same," should summarize today's FOMC statement. There will be no press conference or refresh of the 'dot plot' economic projections. The Fed is expected to continue to taper by $10 billion with confirmation that the "growth meme" is playing out just as they projected (especially after today's GDP print). Goldman believes the focus will be on the jobs 'dashboard' and recent inflation data enables the dovish Fed to argue recent moves were noise and stay easier for longer. The downside risk (for markets) may be that Fed hawks will likely have little luck in altering the way forward guidance is employed by the Fed (and chatter over a Fisher dissent is possible).
RanSquawk's FOMC PREVIEW
- Fed expected to taper by USD 10bln again, taking monthly bond buys down to USD 25bln from USD 35bln
- Yet again, all focus on rate pathway and projections for the first Fed Fund Rate (FFR) hike by Fed officials
- There will be no press conference from Fed Chair Yellen or release of Summary of Economic Projections alongside the decision
TAPERING: The latest announcement from the Fed which coincides with a slew of key economic data such as an initial estimate of growth in the Q2 and the monthly jobs report release by the BLS is expected to result in the Federal Reserve members agreeing on another USD 10bln taper. Likelihood of a larger USD 15bln taper are rather small, as this would almost inevitably risk resulting in a repeat of the “taper tantrum” price action observed last year.
RATES: The accompanying statement is likely to be tweaked to emphasise not only the pickup in growth, but also the subdued and contained nature of inflation expectations. At the same time, members of the Federal Reserve board will continue to actively look at various price measures including wage inflation and debate on the best method for raising rates. As such, despite a potentially more upbeat statement, Fed hawks will likely have little luck in altering the way forward guidance is employed by the Fed, with Fed Fund Rate futures pricing in the first rate hike in June 2015. There is however a risk as noted by analysts at JP Morgan that changing description of unemployment from “elevated” to “somewhat elevated” would allow for a more gradual pivot toward recognising progress toward full employment mandate and therefore could pose a risk to current projected rates path. No one on the FOMC is expected to dissent this time although there is an outside chance that Fisher could, after recently saying that waiting a “considerable time” for the first rate hike implies too long a wait.
MARKET REACTIONS: Given the expectation of a more upbeat picture on the employment situation, there is a risk that that the decision could be interpreted as slightly more hawkish as the Fed move nearer to full employment. At Yellen’s semi-annual testimony, the Fed chair suggested rates could rise sooner than is currently priced in if the employment situation improves and hence there is a risk of USD strength, downside in Treasuries, steepening of the Eurodollars curve, and downside in equity prices. Conversely if the FOMC continue to state that unemployment remains elevated, then the statement will likely be viewed as more dovish and could weigh on the USD. It is worth noting that due to the close proximity of this decision to the release of US GDP and Nonfarm Payrolls that any market reaction could be relatively muted.
Goldman expects very little change to the FOMC statement.
The FOMC might choose to upgrade the language on growth in economic activity somewhat, and it might also strengthen the language on labor market indicators a touch in recognition of the strong June employment report.
For the most part, however, recent data have supported the characterization of current conditions in the June statement. In particular, the softer June CPI print likely reinforced the Committee’s decision to downplay the firmer inflation prints seen from March to May, and weak housing starts and new home sales reports have likely reinforced concern about the housing sector.
But suggest the focus will be on the jobs dashboard:
Credit Suisse is a little more hawkish:
The easing should end with the Fed’s final QE3 purchases in October. And if current economic and price trends continue, we expect the Fed to adhere to its forward guidance and reduce the degree of policy accommodation.
An adjustment in accommodation probably still is far from imminent, but we now expect the Fed’s first interest rate hike to come in Q3 2015 rather than our earlier expectation of Q4 2015.
In its June 18 policy statement, the FOMC “reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate,” and it will probably do the same on July 30. In fact, we look for few changes in language from the FOMC today.
Assuming continued recovery in the labor market, and modest, though building, price pressures, the Fed will be forced to change its message in the months ahead, explaining that an “appropriate” degree of policy accommodation may well become a “lessened” degree of accommodation.
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