What To Expect From Today's FOMC Statement: Nothing, Says Goldman. So - Time To Fade?
Sampling several investment banks' opinions on what to expect out of today's FOMC decision in a few hours, one would be left with the impression that absolutely nothing will happen. Not surprisingly, this is what the official party line reps and warrants as well, as telegraphed by that faithful mouthpiece, Jon Hilsenrath. And yet if the Fed has finally understood that its role is only effective if it is surprising, this gives all us all the opportunity to not only doubt what the media and the sellside wants us to expect, but to naturally fade Goldman - one of the best trades in the past three years - who says: "We expect no clarity from Wednesday's FOMC statement and press conference on additional monetary easing. Fed officials will not close the door but are also unlikely to provide a clear hint of further action. Our forecast of additional easing hinges not on what Fed officials say this week, but on our expectation of continued weakness in the economic data." Of course it is possible that the Fed is merely staying true to its recent creed of being honest and transparent and telegraphing policy from miles away. And is thus forced until the market is actually driven by actual macro data instead of who buys how many gizmos using student loans. Or not. Because when in doubt, always ask i) what would Goldman Sachs sell and ii) what would PIMCO buy. The two are rarely both wrong at the same time.
From Goldman Sachs:
Following a two-day meeting on April 24-25, Wednesday's FOMC action will include the same schedule of events as the January 2012 meeting. First, the regular FOMC statement will be published at 12:30pm. Second, materials from the Summary of Economic Projections (SEP) will be released at 2pm. These will comprise of updates of Table 1 showing the range and central tendency--the range excluding the top 3 and bottom 3 entries--of the 17 FOMC meeting participants' macro projections; and of Figure 2 showing the distribution of 17 projections for the federal funds rate by year (through the end of 2014) and first rate hike (through 2016). Finally, Chairman Ben Bernanke will deliver his opening statement for the press conference at 2:15pm, and then take questions from a group of journalists.
Our expectations are as follows:
1. No policy changes and no hints of QE3. We do not expect changes to the main policy parameters. In particular, the committee is very likely to retain its current guidance that economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014,” but it is unlikely to include any comments on possible easing options. We do expect, however, that the FOMC will discuss policy options under alternative scenarios for the economy, including options for additional easing. Chairman Bernanke may be asked this question at the press conference. We expect him to steer a middle ground, leaving open the possibility of additional monetary easing.
2. A slight strengthening of the "significant downside risk" phrase. Given the deterioration in the European sovereign debt crisis over the last month, we expect that the statement will soften or remove the phrase that “strains in global financial markets have eased.” One option would be to go back to the January formulation and simply state that "strains in global financial markets continue to pose significant downside risks to the economic outlook."
3. Nods in the direction of softer data and lower energy prices. Although changes to the description of economic activity will likely be small, we expect the committee to acknowledge the weakening of the dataflow in recent weeks. Instead of saying that "labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated," the committee might say that "labor market conditions have improved further but the unemployment rate remains elevated." To reflect the decline in energy prices in recent weeks, the committee might say that higher energy prices “have boosted” inflation--instead of saying that energy prices "have increased lately"--but then reaffirm that this boost should be temporary.
4. A slight upgrade of the January forecasts. Despite the recent softening of the data, Fed officials are likely to upgrade their economic forecasts (which were made in January). Exhibit 1 below shows our expectation for these changes. First, we expect an unemployment rate midpoint of 8.05% for end- 2012 (down from 8.35% in January), 7.65% for 2013 and 7.05% for 2014 (both down by one tenth). Second, we anticipate an increase in the mid-point for core inflation from 1.65% to 1.75% for end-2012, and a 5 basis point (bp) upgrade to the mid-point in 2013 and 2014.
5. Small hawkish changes to participants' funds rate projections. Some members may lift their funds rate projections--which are shown in Figure 2 of the SEP--in response to their upgrade of inflation and unemployment. Our estimated Taylor rule, however, would suggest that these changes should be relatively small. The bottom of Exhibit 1 shows that we only expect the upper bound of the central tendency to increase by 25bp in 2013 (when it is sufficient for one participant to lift his or her projection) but not in 2014 (when at least three participants would need to raise their projections by 25bp or more). This change might increase the number of participants that are projecting the first rate hike for 2013 from 3 to 4. Also, given the slightly lower profile for the unemployment rate, we think that it is possible that a participant who currently expects the first hike in 2016 might move into the 2015 camp.
Beyond this week, we continue to forecast additional monetary easing at the June FOMC meeting. This prediction does not rest on an expectation of a "dovish signal" this week, but on our expectation that the economic data will continue to disappoint over the next couple of months given higher gasoline prices in the first quarter, the fading short-term inventory cycle boost, and a "payback" for the warm winter. Our confidence in the forecast of additional easing is not particularly high; it is certainly possible that the FOMC will decide yet again to let an asset purchase program lapse without having put a successor program in place. However, this week's FOMC meeting is unlikely to provide a clear signal one way or the other.
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