What To Expect From FOMC? - Views From 15 Major Banks

The following are the expectations for today's December FOMC meeting as provided by the economists at 15 major banks. 

Goldman: Although it is still a close call, the strong employment numbers suggest that the FOMC will make some changes to its “considerable time” forward guidance at the December 16-17 meeting...So how will the language change? In the 2003-2004 playbook, “considerable period” gave way to “patient” as a signal that the hikes were drawing closer, and it is interesting that the words “patient” or “patience” have shown up quite frequently in recent Fed speeches. The problem with a simple shift to “patience” without any qualifications on December 17 is that back in 2004 this shift occurred just 4½ months before the first hike, and some market participants might therefore take it to mean a hike before June. We doubt that the FOMC would be comfortable sending such a signal, especially given the decline in both inflation breakevens and survey inflation expectations in recent months. One simple way out for the committee would be to say explicitly that the shift to “patience” (or some similar term) reflects the ongoing progress in the recovery along the forecasted path and is not intended to convey an earlier liftoff date than the previous language. Beyond the question of what will happen at the December 16-17 meeting, our own baseline forecast remains liftoff in September 2015, followed by a somewhat steeper and ultimately bigger increase in the funds rate than currently discounted in the yield curve. We have not made any changes to this forecast, because we have not changed our basic outlook for the economy. Barclays: Our US economists expect the Fed to drop its “considerable time” policy rate guidance from this week’s FOMC statement in favor of language that signals patience and a data-dependent reaction function. As for the summary of economic projections (SEP), they are likely to upgrade growth projections modestly higher with a faster decline in the unemployment rate and continued expectations of a move higher in core inflation. Against the backdrop of modest changes to the SEP, we think the “dots” representing FF rate path forecast are likely to remain unchanged. The removal of “considerable time” language is likely priced by the market to some extent, and even if it is not, Fed Chair Yellen would likely talk down the effect of removing the word by emphasizing the data-dependent nature of the policy outlook and the Fed’s willingness to stay patient during her press conference. Thus, we think the overall effect of removing the “considerable time” language on FX and US rates may rather be limited. That said, constructive views on the US economy and a tweak in the forward guidance is consistent with our view that the Fed will stay firmly on a gradual policy normalization path, and we remain bullish on the medium-term prospect of the USD.

SocGen: The SG view is that the ‘considerable time’ wording will be changed into something that emphasises patience and leaves the Fed with greater freedom to raise rates within 6 months if they choose to. That’s in line with the consensus of economists, though the wider market is sceptical (see the way the Eurodollar futures strip is priced, for starters). Given market pricing, any change in the statement would be dollar-supportive and volatility-inducing in general.

BTMU: We expect the “considerable time” phrase to be removed from the statement this evening and may well be replaced by something like “patient” to emphasise the scope available for the FOMC to wait before raising the federal funds rate. That scenario seems widely expected at this stage but may still prompt some initial market volatility. For Chair Yellen we expect her to emphasise the “data dependent” nature of monetary policy decisions ahead. She is likely to play down whatever the wording signal is perceived to be in the Q&A and simply focus on the importance of how the economy progresses over the coming months. On the positive front, Chair Yellen will once again have to acknowledge the fact that the labour market has strengthened more than expected – indeed, this may well be where we see a notable change in rhetoric from the Fed. We suspect that perhaps the biggest source of potential volatility this evening will come from comments on international financial market conditions. If recent volatility is played down, like in some recent Fed officials’ comments then we could see greater volatility and a stronger dollar. If markets sense increased Fed concerns over financial market conditions and rate increase timing could be pushed further back, easing upward pressure on the dollar.

BNPP: The long-awaited Fed policy statement should be US dollar bullish. With FX price action seemingly increasingly driven by position adjustment, flight from risk and repatriation by US investors, the meeting result may not be the clear-cut market catalyst many have been expecting it to be over the past few weeks. We expect the FOMC to look past the recent external market volatility and respond to steadily improving data with a removal of the “considerable time” language. The message will likely be balanced with new language promising “patience” in removing accommodation, and we expect Chair Yellen to emphasize in the press conference that the Fed will move very slowly and cautiously towards rate hikes. Still, we think the overall message will be very consistent with the Fed beginning the tightening process by the middle of next year, which should be generally supportive of the USD as we emerge from the current period of volatility.

Credit Suisse: We expect “considerable time” to be deleted as soon as the December 16-17 FOMC meeting but replaced with language that preserves flexibility on the timing of the first rate hike. The Committee will also have the recent market tumult to consider as it weighs adjustments to its language, with global jitters and year-end illiquidity potentially giving reason for a more dovish calculation. The market will also have its eyes on how the Committee describes inflation given the decline in oil and drop in market-based inflation expectations. We think the USD is likely to have a very directional reaction to the FOMC statement. A removal of the “considerable amount of time” phrase would likely be supportive for the USD, and vice versa.

Nomura: We expect the FOMC to make changes to its “forward guidance” when it meets this week for the final time in 2014. In particular, we expect the FOMC to drop the statement that it expects to maintain its 0 to ¼ percent target for the federal funds rate for a “considerable time.” In its place, we expect the FOMC to add new language indicating that a hike in short-term interest rates is not imminent. Moreover, we expect the Committee to continue to stress that future interest rate decisions are “data dependent” and that the path for short-term interest rates is not on a predetermined course. We also expect the FOMC statement to reiterate that, after “liftoff,” the adjustment of short-term interest rates will be relatively slow. Given the recent performance of the economy, we do not expect major changes in the FOMC‟s backward-looking assessment of the economy. The Committee will likely acknowledge that recent declines in oil prices will temporarily lower headline inflation. But the recent surveys reinforce the Committee‟s judgment that inflation expectations remain well anchored.

BofA: Anticipation for the December FOMC meeting is high, as the Fed faces a growing dilemma that many other central banks only wish they had: improving activity and employment in the face of persistently low inflation. While much attention will be given to the fate of the "considerable time" language, in our view the bigger question is whether the FOMC acknowledges the steady undershooting of inflation in the data and declining inflation expectations, or writes them off as transitory and likely to reverse as the labor market recovery continues. The former would suggest a more dovish path for policy, consistent with our call for liftoff in September 2015, whereas the latter would be more hawkish, particularly relative to market pricing...As we have noted elsewhere, the Fed wants to guide markets toward the eventual liftoff of rates, not shock them. Our base case is that updating the language is somewhat more likely than not, but whether the FOMC replaces "considerable time" with language emphasizing patience or leaves the forward guidance unchanged, the goal will be to smooth the market's reaction. The Fed does not intend to signal a fundamental shift in policy, and we expect Chair Yellen's press conference remarks to reinforce this point. Other than a possible initial knee-jerk reaction then, we expect limited market response to replacing "considerable time." That said, we think the risk is for markets to take a more hawkish message from the cumulative changes in the statement and the forecasts. 

RBS: 1- FOMC statement: The Fed does remove "considerable time" and replaces that language with "patient" language, which would be consistent with a mid-2015 rate hike given the use of "patient" in its signalling prior to the 2004 rate hike cycle...USD Positive. 2. Press Conference: The Fed does little more than acknowledge rising stress in financial markets, giving no indication of shifting views on rate hikes...USD Positive. 3 FOMC projections: The net impact of stronger economic data and a move lower in market measures of inflation expectations may mean that the Fed's dot point medians for the Fed Funds rate are little changed in December. Similarly, we don't see much scope for a revision to the underlying economic projections...USD Neutral to Dovish.

ING: Not only will the market be looking at whether the ‘considerable’ reference is retained, but also the ‘Dot’ diagram. In March the fact that the Dots tended to coalesce around 1% - suggesting confidence in higher rates – and lifted the dollar. The Fed is well aware the market looks at Dots, so may be reluctant to centre a new set of end 2015 forecasts at 1.50% for end 2015. Even though we’re very positive on the dollar: 1) heavy long dollar positioning, 2) were the Fed to retain ‘considerable’ or 3) removing ‘considerable’ would probably trigger a sharp sell-off in risk assets in the current environment – all suggests the dollar will struggle to hold gains on the day.

LIoyds: We expect the FOMC to change its forward guidance as a signal it is ready to raise interest rates in 2015 . We see risk of a ‘buy the rumour, sell the fact’ effect suggesting potential for a modest USD sell-off The UST curve is expected to bear-flatten, but the move is unlikely to be large and sustained.

CIBC: The Fed could drop its “considerable time” pledge on rates and replace it with a reference to data dependency, but will still have to sound somewhat dovish since rates are being left at near zero.

Danske: At the meeting tonight, we expect the FOMC to remove considerable time from the statement, which should put upward pressure on short US rates and support the USD. The FOMC is likely to revise down its unemployment and inflation projections for next year but more interesting will be changes in the dots reflecting individual members’ projections of the Fed funds rate.

SEB: Although its not a done deal by any means, in light of the strong US labor market the most likely outcome is that the Fed's guidance concerning its key rate will change at this week i inyerest meeting. 'Patient' may replace 'considerable time' much like it did ahead of the previous rate hiking cycle in 2004.

Credit Agricole: We continue to look for a Fed funds rate hike next summer. We look for no change in the Fed funds target at the December FOMC and believe the Fed will begin to gradually raise rates in Q315. We believe the odds favour removing the “considerable time” reference in the FOMC’s forward guidance while noting the FOMC’s patience regarding the timing of the first rate hike. We do not believe that this would signal a change in the policy outlook, which remains dependent on the data. We expect Chair Yellen to stress the data dependency in her press conference remarks.

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