Fed Forecast: First meeting chaired by Yellen might not bring policy changes but could spur volatility

Janet Yellen, who on March 19 will chair the Federal Reserve meeting for the first time, is not expected to introduce any drastic policy changes and should rather follow in the footsteps of the former president Ben Bernanke while trying to manage market expectations as far as the timing of rate hikes is concerned.

In her testimony before the House Financial Services Committee and later the Senate Banking Committee in February Yellen signaled that the Fed would continue reducing its bond purchase program at regular intervals, provided the US employment situation improved further. However, she moved away from specific threshold targets for an interest rate hike.

Market experts who took part in the forecast report on the March FOMC meeting, agree that the Fed will continue tapering the quantitative easing program at 10 billion dollars per month. According to Alistair Cotton, if previously there was any doubt about such an outcome “Friday’s strong NFP number put it to bed.”

“The unemployment rate has been decreasing (maybe too fast, which the Fed has not projected) steadily and this has been one of the main factors the Fed has been observing,” Adam Narczewski adds.

We have to bear in mind however that, as Steve Ruffley reminds, “after the 15 minute spike we saw after the NFP, the S&P spent the rest of the session aggressively moving lower, meaning that the better than expected figure did not make up for the previous NFP disappointments.”

Nevertheless, general consensus points to another 10 billion dollar taper in March (“from $35 billion to $30 billion per month of longer-term Treasury securities and from $30 billion to $25 billion per month of agency mortgage-backed securities,” Alberto Muñoz specifies), and due to the fact that the move has already been priced in by the markets, it should not affect them. What could cause volatility though is “Yellen's speech and any tip on upcoming moves,” as Valeria Bednarik suggests.

The FOMC will announce its monetary policy decision on March 19 at 18:00 GMT. Below you will find the full forecasts of the contributing economists.

Steve Ruffley - Chief Market Strategist at InterTrader.com:

"Yellen was very clear that she would follow in the footsteps of Bernanke. I don’t think this has changed. Earlier in the month Yellen was quoted to have said the central bank must keep its eye on the 'unusually high' incidence of long-term unemployment and the 'exceptionally high' proportion of Americans who can find only part-time work as it plots a tricky reversal of its very accommodative policy stance.
 
With the better than expected NFP there could have been an argument that this was not the case, however after the 15 minute spike we saw after the NFP, the S&P spent the rest of the session aggressively moving lower, meaning that the better than expected figure did not make up for the previous NFP disappointments.
 
Now the FED have stared the QE taper the $10bn is certainly the bench mark. I would think it’s very unlikely that the Yellen and the FED will do anything but reduce the bond buying program to $0 over the next series of meeting. As to what will happen if and when this happens in the US is anyone’s guess."

Alistair Cotton - Senior Analyst at Currencies Direct:

"If there was any doubt in the market as to whether the Fed will deviate from its $10bn per month tapering program, Friday’s strong NFP number put it to bed. Mentions in recent Fed minutes of the weather were way above normal, reflecting the Fed’s assessment of the economic effects of the tough winter in large parts of the east coast of America.  The US central bank was fairly confident the recent run of disappointing data was a temporary blip rather than something more troubling and at this stage they look likely to be right.
 
With that in mind, it would be a huge surprise if any change in tapering was announced, given the impact it would have across the financial markets who are finally getting used to the pace of reduction in purchases. Given recent talk about the ‘risks’ associated with forward guidance it may be that the Fed uses this meeting to show more detailed discussions on guidance after the tapering program is complete."

Nicky Ong - Co-Founder of Traders Corner:

"After Janet Yellen reiterated the Fed’s commitment towards tapering asset purchases in her testimony to congress, the market has begun contemplating the possibility of the central bank increasing the rate of scaling back on bond purchases at the March meeting.
 
I believe this to be premature considering the inconsistent nature of recent employment data and consumer activity. I expect the Fed to maintain its rate of taper at $10bn per month, but might use this opportunity to address the current status of forward guidance on monetary policy. The 6.5% unemployment rate is within touching distance, and inflation remains anchored. Removal of this threshold for an interest rate hike would allow the Fed greater flexibility in monetary policy moving forward."

Bill Hubard - Chief Economist at Markets.com:  

"The FOMC announcement on 19 March will be notable as it will be followed by Janet Yellen's first press conference, and the announcement will be accompanied by a new set of Fed officials' projections on the Fed funds rate path and unemployment. The market is fully expecting a revision to the current “forward rate guidance”, which sets a 6.5% unemployment rate threshold for considering rate increases. The threshold is almost certain to be dropped, but what it will be replaced with is uncertain. The market reaction to the shift in “forward guidance” is thus likely to be minimal, but if future data releases deviate from the expected path of moderate economic growth and low inflation – for example, if growth resumes more strongly than expected and is accompanied by higher headline inflation -- the market is likely to react with greater volatility than if the Fed were anchored by a quantitative measure.

The only hope for a recovery in risk in the near-term lies in the hands of Janet Yellen.  The tone of her testimony will either exacerbate or ease the selling in the FX market.  Based on the decline in US Treasury yields and steadiness in US equity markets investors do NOT expect any particularly damaging comments from the Fed chair. We know that she is thinking about changing “forward guidance” but with 2 more weeks to go before the next FOMC meeting we doubt that she will jump the gun and share her plans on changing monetary policy before the entire committee convenes and discusses their options. Let’s not forget that Janet Yellen has yet to chair her first FOMC meeting. She's obviously been intimately involved in past decisions but there's absolutely no benefit to front running the FOMC.  We believe that Yellen's comments should be more beneficial than detrimental to USD and risk."

Alexandra Estiot - Senior Economist at BNP Paribas:

"During her testimony before the House and Senate banking committees, Janet Yellen made it clear that the bar to decrease the pace of tapering was very high. Even if she did not provide any specifics, she declared that it would take a substantial deterioration of the outlook. As for now, the outlook for the US economy is intact: the strong headwinds that prevented a strong recovery following the 2008-09 recession, and even lowered performances from one year to the other in 2013, are losing steam. The eurozone economy is getting better, but more importantly, the fiscal break is applied less harshly. The current projections from the CBO shows that the year-on-year cut in the federal deficit will be, in FY 2014, the smallest since FY 2012, when GDP growth was 2.8%, the strongest in seven years. Admittedly, as households had to tap their savings to hold their consumption last year, they will have to reverse part of the development, limiting the rebound this year. But the fact that economic indicators surprised on the downside in early 2014 is, at least partly, related to bad weather, something Miss Yellen also acknowledged during her hearing. With no change in the narrative behind the Fed’s forecasts, there is no reason to change the path of the tapering.

As for Janet Yellen’s first press brief, we do her to seize the opportunity to clarify the forward-guidance, which, as the unemployment rate approaches 6.5%, becomes less powerful despite the enhancement introduced in December last year. From speeches, to interviews, it appears that Miss Yellen wants the Fed policy to shift horizon, becoming less forward-looking and more evidence-based. In clear, she would wait until the labour market gives clear signs of building inflationary pressures before tightening monetary conditions. Sure enough, and if we are wright about that, she will have to fight some regional Fed Presidents…"

Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:

"I expect the Fed to continue cutting the QE3 program, this time by another 10 billion dollars. There is no reason why the process of lowering the amount of money being pumped into the economy should be stopped. The economy is developing as expected and the labor market has been showing signs of stability. The unemployment rate has been decreasing (maybe too fast, which the Fed has not projected) steadily and this has been one of the main factors the Fed has been observing. At the same time, I believe that Janet Yellen will announce the continuation of QE tempering in the upcoming months. It is still too early to talk about any possible interest rate hikes since those we can expect at the earliest by the end of 2015."

Yohay Elam - Analyst at Forex Crunch:

"The taper train is on track and the Fed is very likely to reduce its bond buys by another $10 billion. After the Fed prepared markets for the tapering during a long period of time, only a major disaster could change the course. The recent OK NFP left little doubts. In addition, the composition of the FOMC is more hawkish, and Yellen would need to prove she is tough enough. It is her first decision and being a woman probably also plays a role. In the press conference, she is expected to show continuity, following in the footsteps of Bernanke, and in line with her recent lengthy testimonies in Washington. The move is largely priced in, and a strengthening of the dollar in the aftermath of the decision could be quite limited."

Alberto Muñoz, Ph.D. - Forex Analyst at FXStreet:

"Federal Reserve Chair Janet Yellen testimony before the Senate clearly showed that she's going to continue with Bernanke's approach. As long as the asset purchases program is conditioned to a substantial improvement in the labor market, and considering the better than expected February Non Farm Payrolls report, it's very likely that the Fed will reduce the pace of  its bond purchases by $10 billions, from $35 billion to $30 billion per month of longer-term Treasury securities and from $30 billion to $25 billion per month of agency mortgage-backed securities.

The main question now is: what's next? Yellen is known as a dovish member inside the FOMC so I would not expect a strong reduction in the pace of asset purchases in the next months as she will keep a highly accommodative policy, that is, wait and see. Therefore until we don't have labor market data for March I'm afraid there won't be too much changes in Fed's monetary policy and tapering will remain the same unless we have very positive or negative surprises in the labor market data. I would expect a bearish greenback in the next weeks though a strong bounce is overdue in the short term, with EURUSD retracing back to 1.3750 - 1.3780 before moving higher."

Valeria Bednarik - Chief Analyst with FXStreet:

"I do believe that is pretty clear that Janet Yellen will stick to the ongoing tapering plan, and it will be no surprise to see another $10B cut. The market in fact, has already priced in such movement considering the paced reduction in liquidity won't be enough to actually affect it. For the most, I would expect that a $10B cut won't be affecting much markets, and if anything, Yellen's speech and any tip on upcoming moves may bring some action. An unexpected scenario like no reduction this month, will likely turn into a dollar selloff, as it will signal a weak economy that still needs aid. On the other hand, a reduction above $10B could give the greenback a boost across the board, but chances of any of these last happening are quite limited."