All You Need To Know About Today's FOMC Meeting

We previously laid out some of the key expectations and questions ahead of Wednesday's hawkish FOMC decision, when new Fed chair Jay Powell is virtually guaranteed to raise rates by 25bps, with the only question being whether the FOMC "dots" will rise enough to indicate 4 rate hikes in 2018, or stay at 3, and whether the Fed will change the FOMC day format to add a press conference after every meeting. 

Here, for those who missed it, or are still unsure what to expect, here is a preview of tomorrow's main event with the help of RanSquawk:

RATE PATH: A 25bps hike to 1.50-1.75% is priced in with over 90% certainty by money markets. More interest will be on how many hikes the FOMC projects in 2018 (currently three), and over its forecast horizon (seven; federal funds futures barely price five over that horizon).

Unlike December 2017, where Kashkari and Evans dissented to lifting rates, BoAML expects the decision to be unanimous in March, given the hawkish rotation of FOMC voters.

HOW MANY HIKES: Consensus is split whether there will be three or four hikes in 2018. Goldman Sachs says recent hawkish remarks by Fed officials suggest a broad shift in the Committee’s outlook towards a faster pace of tightening, and it sees the Fed signalling four rate rises this year, although not in later in the year. Even so, UBS posits the theory that the doves’ forecasts may simply play catch-up – the hawks were always shooting for three/+ hikes – and, accordingly, the dots could just be narrowed at the lower-end of the spectrum, with the median remaining three. Additionally, the impact of fiscal stimulus will filter through later along the forecast horizon. By maintaining the three hikes view, the Fed would have more flexibility to better assess inflation trends and the likely impact of fiscal stimulus in later meetings, leaving the option to add the ‘fourth dot’ in June or September. And even if the Fed kept ‘three dots’ in 2018, it could still play a hawkish card by adding another rate rise to the 2019 profile, where it currently has two hikes pencilled in.

Morgan Stanley is far more lukewarm, and it expects that at the current rate of tightening, there will be a flat-to-inverted yield curve, which together with continued balance sheet runoff and tighter financial conditions, will warrant close examination of how much further the FOMC wants to push rates in this cycle. Thereafter, in early 2019, fiscal stimulus will push a very late-cycle economy to new heights Morgan Stanley believes, leading the Fed to hike two additional times—in March and June. The bank predicts that the midpoint of the target range will be near neutral (at 2.625%), at which point believes the hiking cycle will end.

Goldman meanwhile writes that while its own forecast is that the FOMC will deliver four hikes both this year and next year, it expects a more measured increase in the dots, as shown in the chart below.

As Goldman's Jan Hatzius calculates four members would have to boost their projections above the December median (of three hikes) for the March SEP to show a four-hike baseline in 2018. Six individuals projected a three-hike 2018 pace at the December meeting (i.e. just one hike below four), and given the upbeat public remarks and encouraging data, Goldman believes such an increase is indeed likely, and also expects the 2020 median dot to increase, but by less than half of a hike.

Meanwhile, BofA's baseline forecast is for the median dot to stick at three hikes for 2018 (2.125%), move up to three hikes in 2019 and hold at 1.5 hikes in 2020, leaving rates at 3.25% at end of 2020, and expects the long-term dot to shift up slightly to 2.875%.

* * *

SO WILL IT BE 3 OR 4 HIKES IN 2018? the 2018 median was 2.125% for the December 2017 dot plot. For this rate to increase 25bp, four of the dots at or below the median would have to shift to 2.375%. In other words, for the median path in 2018 to move to 4 hikes the dot plot would need at a minimum all but one participant currently at 3 hikes to move to 4.

The following table illustrates just what it might take.

 

FORECASTS: Growth projections will likely be nudged up in 2018 and 2019 on the back of fiscal stimulus. And this will be likely be accompanied by a lower unemployment rate (but not necessarily a lower NAIRU rate) and slight upward revisions to the Fed’s PCE/core PCE view, Pantheon Macro says.

* * *

ECONOMIC PROJECTIONS: Financial conditions remain easy, but are broadly unchanged since the FOMC put together its last round of projections in December, with easing from moderately higher stocks and a weaker dollar almost fully offset by higher Treasury yields. As such, THE FOMC has little impetus to change its forecasts due to financial conditions. However, Morgan Stanley expects that policymakers will incorporate additional upside from fiscal policy into their March growth projections, with tax reform and fiscal spending packages having been finalized after the last projections were put together in early December. As Chair Powell noted in his congressional testimony, "my personal outlook for the economy has strengthened since December." Indeed, other policymakers have expressed optimism about the economic outlook as well. Governor Brainard, for example, indicated that "[m]any of the forces that acted as headwinds to U.S. growth and weighed on policy in previous years are generating tailwinds currently." On fiscal policy, Brainard noted: ".. on top of [December's tax legislation], the recently agreed-to budget deal is likely to raise federal spending by around 0.4 percent of GDP in each of the next two years." Fiscal impetus of such a  magnitude easily poses upside risk to December's GDP growth forecasts for 2018 and 2019 (more heavily weighted toward 2018). Meanwhile, with inflation data unfolding in line with expectations, financial conditions roughly unchanged in December, and the assumption that any added fiscal stimulus comes with growth in productivity (dampening the inflationary effects of faster growth), Morgan Stanley sees no need for the FOMC median forecast for core inflation to be revised at this meeting. The bank's projected changes in the March Econ Projections table is below.

FEDSPEAK: Recent Fedspeak has raised hopes of an upward revision to the rate path; Trump’s fiscal stimulus plan, as well as nascent signs of inflation (wage growth has firmed, headline CPI is above 2.0%, though both core CPI and core PCE lag, PPI hints at inflation pressures) has seen dovish FOMC members like Brainard and Bostic (both voters) talk-up a higher trajectory, while centrist Dudley (voter) said four rate rises this year is consistent with gradual normalisation. Chair Powell struck a balanced tone at his recent dual-testimony to lawmakers; he retained the optionality of four hikes via an optimistic assessment of the economic outlook – commenting that recent data has increased his confidence that inflation will rise. He noted that “we” (implying the Committee) are not currently seeing strong evidence for a decisive move higher in wages. That view was ultimately corroborated by the latest earnings data in the Employment Situation Report, which saw the YY rate of wage growth ease back slightly following January’s upwards spike.

What other FOMC participants have said recently about the number of hikes this year:

  • Boston FRB President Rosengren (3/9/18): To keep the economy on a sustainable path, I expect that it will be appropriate to remove monetary policy accommodation at a regular but gradual pace – and perhaps a bit faster than the three, one-quarter point increases envisioned for this year in the assessment of appropriate policy from the December 2017 FOMC meeting.
  • Philly FRB President Harker (2/8/18): I still have penciled in two because I'd like to see us slightly overshoot our 2% inflation target, but I think there are some risks to the upside, where I would be open to three going forward.
  • Dallas FRB President Kaplan (2/2/18): I’ve said that I think the base case for 2018 should be three removals of accommodation, and we’ll see—it could be more than that, we’ll have to see.
  • NY FRB President Dudley (1/18/18): The forecast that the FOMC wrote down in December, in the December SEP, where the median was three rate hikes in 2018 seems like a very reasonable type of forecast...it could be more.
  • NY FRB President Dudley (3/1/18): If you were to go to four 25 basis point rate hikes, I’d think it would still be gradual.
  • Atlanta FRB President Bostic (3/7/18): According to Bloomberg, Bostic said that in December he was expecting two rate hikes this year, but has moved to three.

* * *

NAME THAT DOT:  As noted above, the greatest uncertainty is how many hikes take place in 2018, and that we would need to see four FOMC officials move from the three- to four-hike camp for that to happen. Based on BofA calculations, the most likely members in the three-hike camp in December were Yellen, Powell, Kaplan, Dudley, Williams and Quarles. The risk is that Quarles and Dudley move to the four-hike camp, but Kaplan will likely stay at three hikes. It is a close call for Powell and Williams. While the median forecast would therefore stay at 2.125%, the mean will move higher by just over half a hike, but with risks of a bigger gain.

POWELL PRESSER: It is hard to judge how Powell will handle his first press conference, but if his recent testimonies are anything to go by, he will deliver "an optimistic and positive tone" according to BofA. He will likely sound optimistic on the outlook, where headwinds are becoming tailwinds, BNP Paribas believes, while Deutsche Bank says that he may go further and say that risks are now shifting towards an overheating economy. That optimism will require a  degree of hawkishness to justify, especially in the likely scenario that rate forecasts are raised. But Powell will still likely try and achieve a balance. There is an outside chance Powell will be quizzed on whether he intends to hold a post-meeting press conference after every rate decision, to which he might respond that it is a consideration; SGH Macro says this will convey a message that ‘every meeting is live’.

BofA expects Powell to field the following questions:

  1. Are long-run growth prospects improving? He will likely suggest the risks are increasingly skewed in that direction, but that it is prudent to wait for more evidence, emphasizing productivity and labor force expansion.
  2. How important are financial conditions? He may note that recent measures have revealed tightening with some signs of funding stress. It will be interesting to see how he links this back to monetary policy.
  3. Will the Fed allow inflation to overshoot the target? He will emphasize the symmetry of the inflation target, but likely offer little information about the alternative monetary policy frameworks that are under discussion.
  4. Will the FOMC move to a press conference at every meeting? BofA expects him to suggest it is under discussion without committing.

While it may not be directly touched upon in the presser, a key point of focus for the rates market will be any discussion around the tightening of financial conditions since the last Fed rate hike. Equities remain below their late January peak, credit spreads are wider, and the 3m LIBOR-OIS spread has blown out since the December FOMC meeting. However, BofA expects the Fed will not sound particularly concerned about the recent tightening in conditions, noting some contraction is to be expected with higher policy rates and a shrinking Fed balance sheet. The Fed would likely be much more concerned about the tightening in financial conditions and rise in LIBOR if it appears to more directly spill over into broader corporate borrowing/investment activity or begins to wane on consumer or business confidence. In other words, until stocks tumble because of the spike in Libor/L-OIS, the Fed will not lift a finger.

* * *

MARKET REACTION: Lifting rates may see a modest rally along the front of the curve, BoAML says; and Rabobank adds that if inflation doesn’t materialise in the medium/longer-run, a curve inversion could be on the cards. A steeper curve will require the Fed to raise expectations of the terminal rate by notching up its long-term rate forecast, which could see underperformance in the five-year sector, BoAML says; the bank sees the 2s5s curve steepening, and the 5s30s flattening. Either way, BoAML – who has been more positive on the USD than the street – sees the risks skewed towards USD-bullishness. In a hawkish scenario, Barclays has recommended short NZDUSD to take advantage of the monetary policy divergence theme between the Fed and what is likely to be a dovish RBNZ (whose rate announcement follows the Fed’s on Wednesday). Refraining from raising the long-run rate view too aggressively (or at all) may be a recipe for risk assets to perform well, but not the USD given concerns about the toxic mix of both easy monetary and fiscal policy (SocGen).

* * *

FOMC REDLINE: What will the Fed say? We leave readers with two blackline FOMC statement previews, one from Morgan Stanley and one from Goldman Sachs, laying out where the two banks expect to see changes to the Fed language.  What is interesting is that while both banks expect a modest walk back of the current economic conditions - especially in housing - while leaving the rest of the statement unchanged, they still expect a 25 bps hike. 

First, here is Morgan Stanley:

And here is Goldman's preview:

Comments

Bryan Tue, 03/20/2018 - 22:21 Permalink

I thought the common opinion here was that they CANNOT EVER hike rates?  Wouldn't that increase interest payments on our massive debt and eventually bankrupt the country?  What's up with that now?  How are they hiking rates and getting away with it, apparently?  Inquiring minds want to know.

P.S. - If Powell realizes he cannot hike "real" rates and decides not to tomorrow... add +2000 on the Dow and another +100 or so on the S&P.  And the USD would be toast.

rccalhoun Pinto Currency Tue, 03/20/2018 - 23:39 Permalink

its a game.  dot plots.  inferred reactions.  alliances---hidden alliances.  motives.  legal jargon.  parsing words.

the fed used to fight inflation----that was their only mandate.  inflation = rate hikes....they didn't need a committee.

now, they are all tied up in the mumbo-jumbo, politics and mixed directives.  

each voting member should declare who they answer to.  whom does each get their orders from?

In reply to by Pinto Currency

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In reply to by slopz38

RabbitOne Bryan Tue, 03/20/2018 - 23:12 Permalink

“...I thought the common opinion here was that they CANNOT EVER hike rates? ...”
You need to look at both sides of the picture. Yes,  hiking rates F—s up the interest uncle sam has to pay more to service the debt. Yes it will K.O. the housing market. But that is not what this is about. Right now the pension system in this country is over $2.5 trillion in the hole because of low fixed rates for the last 9 years. They are scared as hell pension systems like Calpers will go belly up unless they raise rates.

In reply to by Bryan

Silver Savior Tue, 03/20/2018 - 22:32 Permalink

Hike rates you fuckers! 

Pay more to service the national debt! 

Throw us into an even deeper recession and blow the housing market.

Ordered a kilo silver bar tonight and kissed whatever is left of the economy goodbye. Fuck!

I Write Code Tue, 03/20/2018 - 22:34 Permalink

Fed Funds (overnight) 2%, 10-year 4%, 30 year ... um, 4%?

I don't think even the 10-year can get to 4%, and I know the 30-year can't get over 4%.  Not unless about $10t of outstanding debt is put in a lock box under Funk and Wagnall's front porch, and if you're going to do ten you might as well do it all.

So, I believe this will be the *last* Fed increase this year.

Trade accordingly, and post your gratitude fees to my Bitcoin account.

Jung Tue, 03/20/2018 - 23:10 Permalink

Market reaction: Lifting rates may see a modest rally along the front of the curve   ????? What curve? A rally on the stock market?

Or money market? Please specify as it is all complex enough.

Manipuflation Tue, 03/20/2018 - 23:59 Permalink

Simple.  It will be more expensive to borrow digitz.  Do they still do ARM mortgages?  Linda Green?  Rinse and repeat. 

Why not just hike to 5% or 10% and get it over with?  Flush out the bullshit and let prices settle back down.  Housing is full retard high prices again as are autos.  Let the banks deal with it.  Fuck them and no bailout this time.

Of course gold and silver will get whacked because raising interest rates is deflationary.  That's perfect for me.

 https://mises.org/library/why-we-need-deflation-and-higher-interest-rates 

Let them raise rates.  That makes speculation on PM ETFs far less attractive and usually drives the price down.  That's all well and good but their does come a point where no one sells physical or if they do it is at a steep premium.  You effectively have two markets.

You will get a stronger dollar so US cash is not bad if you do FX.  My Canuck buck stash will take a hit but that is only for the ALICE pack anyway.  No big deal.

 

ZIRPdiggler Wed, 03/21/2018 - 00:03 Permalink

None of this hot air is relevant to anything in reality. It's all summer stock theatre to talk the "markets" up or down.  So hike it 5%. WHY NOT?  'mystery buyers' gobble up enormous amounts of sovereign debt on a daily basis, whenever yields walk too far north. There is no price discovery anymore and NOT A SOUL will be able to convince me at this point, that these idiots aren't still doing QE. The point is, it doesn't matter what the FED does, or what Morgan Stanley says when they're simply just making up the rules as they go along. The "market" will take it's marching orders, in accordance with what it is supposed to do, with regard to the FED nonsense talking points. That's how it works.

D.T.Barnum ZIRPdiggler Wed, 03/21/2018 - 07:49 Permalink

I agree, but it affects the psychology of investment and consumption (animal spirits), so that's why it's relevant.  This whole economic system is based on how much and whether the population is "lustful" for materialism.  The FED has to do a tightrope walk to da ngle the carrot on the string, not too far, yet not too close...  seems like it's getting more difficult for them.  As people become isolated and atomized due to social media, they are realizing that "stuff" and internet status does not a happy person make.

In reply to by ZIRPdiggler

lizzoilz Wed, 03/21/2018 - 05:55 Permalink

Fed has been fooling us All along.  They are building up for a big market crash.

 

Shepwave analysis is still only way to trade. Nice call predicting Mondays sell off.

franzpick Wed, 03/21/2018 - 06:55 Permalink

All you need to know is that DJIA, DAX and NIK are now just one bad minus 1-2% day above their Feb lows on their way to bear market lower lows:  

Econogeek Wed, 03/21/2018 - 08:50 Permalink

Dear ZH,

Please leave the 'All You Need to Know' headlines to the MSM, unless you are going over to their side, in which case that's all we need to know.

Thank you.

Econogeek

nsurf9 Wed, 03/21/2018 - 13:59 Permalink

The Fed will make sure the numbers printed on both sides of bills - will not change - until you need some bigger $5,000 Federal Reserve Notes to pay for your loaf of bread.

Until then, count of them to continue stealing U.S. blind and continue robbing all the peasants of even the interest they say we should be getting!

                         Very truly, someone else's,

                         The not U.S., not Federal, Rothschilds' Reserve Bank