What Wall Street Expects From the Fed

By Heisenberg

Well, it’s Fed day and obviously everyone will be kind of frozen in time in the lead up to the decision and the post-meeting presser where Jerome Powell will probably prove (again) that he prefers to answer questions in a more direct, less academic fashion than Janet Yellen.

I continue to maintain that’s not a positive development, because it leaves less room for obfuscation and paradoxically, academic obfuscation (i.e., model-based bullshitting) is a highly effective way of letting markets know that the committee is willing and able to conjure up excuses to remain dovish even when the data suggests a different path in the event risk assets are showing signs of cracking. And I know what you’re thinking: “The Fed shouldn’t be concerned about propping up risk assets at every press conference meeting!” Yeah, ok man. Just remember you said that when, sometime down the road, Powell accidentally triggers an afternoon rout by eschewing long-winded rambling for a straightforward answer.

Powell of course hasn’t adopted anything that approximates the approach Kevin Warsh might have preferred, but obviously there’s a perception that he (Powell) is more data-dependent than Yellen and that it will take more in the way of turmoil in emerging markets and much more in the way of exogenous shocks and event risk from things that aren’t directly related to Fed policy (e.g., Italy) to deter him.

On Tuesday, WSJ moved markets with a report that once again suggested Jerome Powell may be moving towards holding a press conference after every meeting, which would effectively mean that every meeting is live. That got a reaction across fed funds futures and pushed the dollar higher. A move to take questions after each meeting could potentially set the stage for more volatility – or at least that’s the way I would see that panning out, even though I’m sure that wouldn’t be the intent and I’m sure a lot of folks wouldn’t agree with me.

Beyond communications strategy, traders will obviously focus on the dots, any technical IOER tweak and what are expected to be several changes to the statement.

For the full preview, see “Jerome Powell Is Sorry, Not Sorry. What To Expect From The Fed Meeting“, but for those interested in a quick rundown of analyst opinions, you can find a compilation below via Bloomberg:

  • Morgan Stanley (Ellen Zentner, Matthew Hornbach, others)
    • Forward guidance will be updated to indicate that stance of monetary policy stance will remain modestly accommodative after the June hike, signaling a move closer to neutral
    • The next rate hike will probably be in September, followed by a pause in December; dot plot will continue to suggest a likely path of three hikes this year and next; only minor adjustments seen to Summary of Economic Projections
    • Strategists suggest maintaining UST 2s30s curve flatteners; June FOMC meeting is unlikely to have any major market-moving information for TIPS; real yield curve should continue to flatten
  • BofA (Joseph Song, others)
    • BofA now expects four rate increases this year as the U.S. economy continues to grow above trend, Fed speakers remain bullish despite tail risks, and financial conditions stay easy; three hikes are expected in 2019
      • Even so, dots should still point to three hikes for this year; “it’s a close call though as it would only take one dot to push up the median to four hikes”; median 2019 and 2020 dots should also remain unchanged
    • Economic assessment in statement should be revised positively to reflect solid job gains, decline in unemployment rate, firmer consumer spending
    • OIS curve should steepen, 5s30s curve to flatten; an upbeat Fed could push USD higher
    • Bond market continues to underestimate the resilience of the economy and determination of the Fed
  • BNP (Paul Mortimer-Lee, others)
    • FOMC continues to shift to a neutral policy regime from an accommodative one; possible removal of “roughly” from the balance of risks language would be a stronger indication of the FOMC’s confidence in the outlook
    • June hike “will feel a lot more like 20 than 25bps,” with FOMC’s May minutes flagging the likely shift higher in IOER
    • Some moderate upgrades seen to economic forecasts, although these will be largely marking to market for 2018
    • BNP doesn’t see median dots changing at this meeting; however, “we are still in the four-hike camp” for 2018; strong activity, higher inflation over the next three months could push more people on FOMC into the four-hike camp in September
  • Credit Suisse (James Sweeney, others)
    • Statement could be modified to suggest fed funds rate is expected to gradually move to neutral; it’s also possible that FOMC removes forward guidance on the rate altogether to eliminate the need for constant adjustments
    • While it’s a “close call,” median 2018 dot should rise to 2.375% and indicate four total hikes for this year; next hikes should be in September, December
      • Medium- and long-run dots are likely to stay unchanged or come down slightly given concerns by some officials of yield curve inversion and recent rhetoric around neutral interest rate
    • Descriptions of economic conditions should be more positive; economic projections will probably be revised to show improved GDP growth, higher PCE inflation for 2018, lower unemployment
  • JPMorgan (Michael Feroli)
    • “There’s about an even chance” that 2018 median dot continues to point toward total of three hikes this year or is increased to four
      • “We’d need to see at least one of the six ‘three-hikers” from March make the discrete move to looking for four hikes now”
    • As for 2019 and beyond, “we see no compelling reason to expect major changes to the dots”
    • Statement may characterize policy as only “somewhat accommodative,” won’t include reference to fed funds rate likely remaining below long-run levels for some time
    • No dissents seen to rate hike decision
  • Market Securities (Christophe Barraud)
    • FOMC will probably come up short on the support needed to push the 2018 median dot higher
      • While only one person is needed to change the median to four hikes from three, the probability of such a change is below 50% based on recent policy makers’ speeches
      • In addition, “for tactical reasons, such a move looks premature”
  • Natixis (Joseph LaVorgna)
    • Potential shift in Fed’s expectations for rates could influence financial market conditions going forward
    • Median 2018 dot is likely to move to four from three; “ultimately, we do not envision this many increases” occurring because inflation is likely to be capped under 2% in 2018 and expectations of a more aggressive Fed should tighten financial conditions
    • Best guess is that if the median 2018 dot moves up, that will cause median 2019 dot to move up 25bps to 3.125% from 2.875%; Natixis doesn’t expect 2020 dot to move higher
  • Pictet Wealth Management (Thomas Costerg)
    • By hiking rates again, the Fed will “cement its routine” of one 25bps increase per quarter
    • Policy makers may feel bolstered by solid labor-market data, moving median 2018 dot up to four hikes
    • FOMC will be cautious regarding tightening signals for 2019-2020; “we do not think the Fed is yet convinced about the risk of ‘overheating’ of the U.S. economy”
  • RBC (Tom Porcelli, others)
    • June rate hike, as a practical matter, “will be 5bps lighter than what we have grown accustomed to”
    • As for the dots, “we think a fourth hike will find its way into the 2018 median estimate”
      • Meanwhile, 2019 and 2020 median dots won’t move much, though “our sense is the averages will move higher”; long-run median should continue to drift higher, “with 3% as its next perch”

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