There is no doubt that the FED’s meeting will draw most of markets’ attention this week. The event is taking place later in the day. The rate decision will be announced at 7 pm BST and the much more interesting press conference will be kicked off 30 minutes later. Market’s participants expect the FED to deliver a rate hike by 25 bps, there are various comments regarding the outlook of the economic activity though. Let us present banks’ opinions as to this event.
In its note the SocGen analysts say that the Fed Funds futures market prices a 25bp rate hike with a strong degree of confidence, but it’s a lot less sure about what happens after that. They indicate that another 18bp hike is priced in for the end of the year, then 26bp for 2018 as a whole and 18bp in 2019. The pricing of end-2019 rates has come down by 25bp since the start of the year, even as pricing for 2017 has risen. The bank points to the FED’s insouciance about market pricing for the peak of the rate cycle, along with the fall in wage growth and inflation since the start of the year, is behind both the dollar’s relative softness, and markets’ overall buoyancy. For that reason a ’dovish hike’ would sustain both these trends, while anything that moves the end-2019 rate expectation upwards is likely to help the dollar and sound (minor) alarms for EMFX investors
One of the most famous investment bank looks for a hike by 25 bps as it sees that move as ’extremely likely’. They expect that statement will likely characterize economic activity as picking up but recognize that inflation slowed since earlier this year. The GS argue that the press conference should provide some clarity on whether the next tightening step after June will be balance sheet normalization or a third funds rate hike. At the end, the GS’s analysts claim that their current activity indicator and real GDP estimates signal that above-trend output growth will produce further labor market improvement, however, the PCE y/y is currently lower than at the March’s meeting.
The Danish bank sticks its view that the Fed will skip hiking at the upcoming meeting and instead announce the triggers for quantitative tightening (QT), as a data-dependent Fed should wait at least one meeting to confirm that recent weakness is only temporary. Simultaneously, the bank notices that high expectations of a June hike might be troublesome as they weighed on the FED’s decision before. Nonetheless, f the Fed hikes in June the Danske strategies do not expect an announcement on QT. Instead, they expect it to be postponed until the September meeting. The bank looks for a third rate hike in December.
CA analysts argue that with the US 10Y yield managing to hold and bounce off the critical trendline support of around 2.13% the market could be better positioned for a reassuring Fed message on Wednesday. They expect a hike and a largely unchanged dot plot which should give some room for US rates to rebound further. The bank claims that the USD’s strength could be reinforced if the Fed gives an indication it is moving closer to the tapering of balance sheet reinvestment, which could start as early as September.
A June’s rate hike it’s already a done deal according to Barclays’ analysts. At the same time, they consider how dovish the statement could ultimately be as a recent dismal streak of macroeconomics releases made some rifts on the US economic performance. Barclays’ strategies suggest that the FED could mention the labor market conditions, however, the main emphasis is to be put on the balance sheet normalization policy that could be potentially begun as soon as September this year.
Analysts of the French bank presented a brief note that they expect the language on the balance sheet is likely to be changed at the FED meeting, setting up a formal balance sheet reduction announcement in September.