Previewing Today's Fed Policy Decision

While normally Wednesday's Fed meeting would be the week's biggest market-moving event, this time - smack in the middle of the busiest earnings week of the year - it may not even make the top three, buried ahead of the coming news of the next Fed Chair (in which Trump is set to unveil Jerome Powell on Thursday), and the GOP tax bill (which just saw its Wednesday release delayed by one day). One can make the argument that tomorrow's fully priced in FOMC announcement is also secondary to not only Friday's jobs report, which may help decide who is right, the Fed's "dots" or the market, but also to tomorrow's Treasury refunding announcement.

In fact, the latter is precisely what JPM analyst Jay Barry claimed earlier today, saying the "quarterly refunding announcement at 8:30am ET Wednesday “has the possibility to be a bigger event for markets in the morning than the Fed statement in the afternoon” and since market are “priced for a December hike,” the FOMC meeting isn’t likely to alter expectations in a way that would move the market. Where there is confusion is in the Treasury market, where market participants are divided on whether the Treasury will announce increases to coupon auction sizes Wednesday, or wait until the 1Q refunding announcement in February: “There’s a dispersion of views because of the pivot the Treasury Department has had over last few years,” specifically toward portfolio metrics and aiming to extend the weighted average maturity of the portfolio. Merely reversing the cuts that have been made to 2Y and 3Y auctions since 2013 wouldn’t serve that objective.

“If they don’t get announced tomorrow, it’s a muted rally, and if they do, it’s a muted steepening, but I think it’s all small because the numbers we’re talking about are only $1 billion month, and because Treasury has been clear in communicating that financing needs are moving higher over the medium term”

Ok so, while hardly the market terror of years and months gone by, at least we one can agree that tomorrow's FOMC Monetary Policy decision will be somewhat important, ranking behind the Fed Chairman choice, the unveiling of the GOP tax proposal, Friday's payrolls report, and tomorrow's Treasury refunding announcement... oh and whatever the latest episode in the Mueller drama reveals.

So what will the Fed say tomorrow? Here consensus is uniform: all those surveyed expect the FOMC to leave its monetary policy settings unchanged this time out, and punt to December when markets are almost fully pricing in a 25bps hike in December. Additionally, tomorrow's meeting is one of the especially boring ones, as there will be no updated economic projections, nor will there be a press conference from Fed Chair Janet Yellen.

Below we present several other observations what to expect tomorrow from RanSquawk:

  • Last time out the Fed formally outlined and announced the implementation of its balance sheet unwind programme, no further guidance on the long-run framework for the balance sheet is anticipated in the upcoming statement.
  • Since then Fedspeak has come to the fore. UBS suggest that “recent Fedspeak has shown an eagerness to move at the December meeting, but given the touch more concern about low inflation relative to earlier this year, participants would prefer to see some more evidence of inflation rising before moving again.”
  • On the inflation front, headline CPI pushed up to 2.2% Y/Y in September, the core metric stood at 1.7% Y/Y for the fifth consecutive month, while core PCE stands at 1.3% Y/Y. The latest US labour market report pointed to an uptick in wages, although it will be several months before we can assess if this was a “one-off” hurricane induced jump, or the start of a broader trend.
  • Looking forwards CME Fed Fund Futures are virtually fully pricing in a December hike, with one additional hike 75% priced in by the end of September 2018 N.B. the Fed’s median estimate looks for 3 hikes in 2018.

Below is an abbreviated take of what Wall Street's various sellside desks are saying about tomorrow's FOMC snoozer :

BAML: We don’t expect fireworks. Since we will only receive the statement and not an updated Summary of Economic Projections or press conference, there are few opportunities for the FOMC to send a signal to the markets about the future direction of policy. Importantly, we do not expect the Fed to explicitly signal a hike in the upcoming meeting on December, as the market is already pricing in an over 80% probability of a hike. There will likely be small language changes, particularly in the first paragraph regarding the economic outlook. It is likely that the FOMC notes that the data have been volatile due to disruptions from the hurricanes and that the Committee is not reacting to such short-term fluctuations. We think they will reiterate that “past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.” We do not expect changes to the characterization of inflation or the risk statement. The FOMC is likely to maintain the language that “near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.”

Barclays: We expect the FOMC to leave its target range for the federal funds rate unchanged at 1.00%-1.25% at the November meeting as it continues to evaluate to what degree recent disinflation is temporary or persistent. The  committee, in our view, is likely to look favourably at the underlying components of the Q3 GDP report which showed a positive contribution to growth from both net exports and inventories; we see trends in these categories as reflecting the synchronized global growth backdrop. Distortions to domestic data from the hurricanes that made landfall in August and September are likely to be ignored.

BMO: We look for no change in the Fed’s policy rates or forward guidance. However, in likely talking a bit more upbeat about the economy, the Fed will signal that December’s SEP-and-presser-packing confab could see a rate hike. There is clearly more slack in the labour market than the headline jobless rate portrays, and the culprits are some of the many reasons why the real neutral fed funds rate might still be close to zero. Other reasons include the non-idiosyncratic factors contributing to a below-target PCE inflation rate of 1.5% y/y (with core at 1.3%). However, with the broad economy, on balance, now at full capacity, the current nominal fed funds rate should be closer to the 1.3%-to-1.5% range to minimize the risk of overshooting the inflation target, while still maintaining an accommodative policy stance from a longer-run perspective.

Deutsche Bank: With market expectations running very much in line with the FOMC’s latest median projection of a rate hike in December, the FOMC will have little reason to either amplify or alter its message in the November statement. We expect an uneventful outcome, with primary focus on the tea leaves in the first two paragraphs: i.e, in how the Committee sees recent and prospective economic developments. On balance, we expect that the economic picture has not changed enough to alter the Committee’s central expectation that it will be raising rates another 25 bps in December, and recent Fedspeak from Chair Yellen and others has not tried to modify that perception. With inflation still running low, we expect the statement to continue to say that “the Committee is monitoring inflation developments closely,” and in our post-meeting assessment, we will take a look at what it might take to change the expected outcome for December.

HSBC: There are unlikely to be any major policy surprises delivered at this meeting, we continue to expect the next 25bps rate hike to come in December. The policy statement may repeat that Hurricanes Harvey, Irma, and Maria disrupted near-term economic activity but are unlikely to impact the medium-term outlook for the economy. The statement will also likely reiterate the Committee's view that inflation may remain somewhat below 2% in the near term but should stabilise close to 2% over the medium term. It is possible the policy statement released after this meeting will note that the balance sheet normalisation programme has commenced.

ING: Financial markets remain sceptical over the Federal Reserve's predictions for the path of monetary policy. Uncertainty over whether Janet Yellen will remain the Chair, low inflation and some concerns about a potential government shutdown in December goes some way to explaining this. However, with Fed officials broadening out the factors justifying tighter monetary policy, such as financial stability and financial conditions, and with growth looking strong and inflation edging higher, we think a December rate hike looks probable.

RBC: On the FOMC statement, practically speaking there is little that needs to change. There were no significant economic developments over the intermeeting period, balance sheet tapering is on automatic pilot (at least for the time being), and the next hike (which the market seems fully braced for) will not come until December. This all suggests no material changes to the statement.

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Elsewhere, and more importantly, the Trump Administration will announce its nominee for the role of Fed Chair on Thursday. Current Federal Reserve Governor Jerome Powell appears to be the front runner, and is seen as the logical replacement to current Chair Yellen by many, with the perception that he would provide a steady continuation of the monetary policy implemented under Yellen. John Taylor appears to be the only other name in major contention at present. Taylor is perceived as a more hawkish candidate owing to his Taylor Rule (which suggests that rates should be perhaps as high as 4.00%), although many have argued that he would not have portrayed such a hawkish view to US President Donald Trump in his interview. One outsider still rumoured to be in the mix (according to Politico sources at least) is former Fed Governor Kevin Warsh, who also falls on the hawkish side of the spectrum. It is also worth remembering that three of the seven seats on the board are vacant at present.

How to trade this announcement? Easy, at least according to Morgan Stanley: just fade the kneejerk reaction in the market and do the opposite.