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

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

Credit Suisse: In the Fed’s statement today, QE3 is very likely to end as planned with a final $15bn taper. For its forward guidance, it is possible the FOMC will choose to preserve the “considerable time” language. But we wouldn’t be surprised to see a wording change that would still give policymakers a great deal of latitude. Perhaps some reference to a “patient monitoring” of economic developments will find its way into the October policy statement. While we remain fundamentally bullish on the USD and hold broadly long USD positions in our model portfolio, we are hesitant to add to them heading into the FOMC decision.

BofA: We expect the FOMC to announce QE3 buying will conclude in October, but to signal that they are not rushing toward rate hikes by maintaining the current statement language. FX: Neutral Fed means USD trend continues. Markets may be priced for some dovish signals from the Fed concerning slowing growth, disinflation, and volatile markets. Our base case of a large neutral Fed statement — the end of QE3 buying but no changes in key language — would disappoint these expectations. That outcome would push the USD higher as the yield curve flattens in a USD-positive direction.

Westpac: Whilst we expect the final $15bln reduction in the taper a no change in the language till the Dec meeting and accompanying press conference the danger will be that a growing number of fed members are likely to show increased dissent to "considerable time" with Fisher, Plosser and Mester likely to object.

BNPP: We do not expect this week’s Fed meeting to unleash a new round of USD appreciation. While the central bank is likely to end its QE3 program on schedule with a final $15bn tapering of asset purchases, we expect the statement to leave in language implying actual rate hikes are unlikely for a considerable period ahead. The statement may acknowledge labour market improvement but could also note recent softer inflation readings. Overall, a statement in line with our expectation should do little to revive USD upside momentum...In short, we think risk reward is not favourable for running USD longs into this week’s meeting, despite our more medium term bullish view on the USD heading into year-end.

Barclays: We expect the Fed to end QE3 and retain language in the statement that “there remains significant underutilization of labor resources” and “it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time.” Finally, we see the committee as saying that monetary policy is not on a preset path, with the size of the balance sheet and timing of policy rate firming conditional on incoming data. See US Outlook for further details.

Goldman: We think that the end of bond purchases will be announced on this occasion. As to the statement, we expect it to acknowledge recent weaker foreign developments but include a slight upgrade to the language on the labor market. The “considerable time” forward guidance will only be adjusted slightly on this occasion, and an overhaul will probably come in December. All told, we think that the FOMC announcement will be neutral to slightly bearish (given the stretched starting point) for the rates market.

JP Morgan: The The Federal Reserve should take the monthly rate of asset purchases to zero but expect falling inflation expectations to loom large and influence the statement of the next language.

RBS: It appears that the market is well prepared for a dovish FOMC and thus further USD weakness may not arise. Especially as attention turns to the next payrolls report next week. However, the Fed could still surprise with more dovish language on inflation and positioning in the short-term speculative market (as illustrated by the IMM futures trading positioning report) suggests there is still a risk of a short-covering squeeze).

SocGen: Along with the majority of observers, we expect a final $15 cut in the Fed’s monthly bond purchases, and no meaningful change in the language from the FOMC statement. There will be no new dots, no new projections and no press conference. It should be a non-event, and you wouldn't rule out another rise in equity indices around the world given the recent momentum.

Danske: At Wednesday’s meeting we expect the Fed to do the following. 1-End asset purchases. 2-Keep the ‘considerable time’ forward guidance. 3-Keep the ‘significant underutilisation’ description of labour resources. 4-Soften the inflation language due to recent lower inflation prints, the decline in the oil price, the strengthening of the USD and a fall in market inflation expectations...We believe the outcome of the FOMC is unlikely to fuel a significant market reaction. The market is already discounting low inflation for a prolonged period and the money-market curve is pretty flat for the first year – the first rate hike is priced in by end-2015. Forward rates have declined some 35-40bp at end-2015 over the past month, so the market is already prepared for a dovish shift in the statement.

BTMU: Given how calm the financial markets remain, it is clear that the key part of this evening’s FOMC announcement is not the confirmation that QE3 has been completed but that we remain some “considerable time” away from the first rate increase. That phrase along with the “significant” under-utilisation of labour resources are both set to remain in the statement – a view that has certainly helped restore calm to the financial markets. The S&P 500 closed 6.6% higher yesterday from the low on 16th October on the belief that any changes to the statement this evening are likely to signal an extension of that “considerable time” period. The dollar has softened somewhat and over the coming days we believe the risks are that we see a further sell-off of the dollar given much of its recent strength has been fuelled by the favourable relative monetary policy story.

Credit Agricole: We look for the FOMC to end QE3 at the October meeting while recent market volatility argues for caution on changes to forward guidance. No change is expected in the fed funds target range of 0% to 0.25%. The FOMC is expected to end its asset purchase program with a $15 billion final reduction, phasing out QE3 at month’s end while maintaining its existing reinvestment policy. With no Summary of Economic Projections (SEP) update or press conference scheduled, market participants will focus of changes in the statement text. We expect the economic assessment in the FOMC statement will mention further improvement in labor market conditions. However, we suspect that the FOMC will retain the reference to “significant underutilization of labor resources” based on a range of labor market indicators.

UnuiCredit: We expect the asset purchase program (QE3) to be completed as planned and we foresee a final switch from forward guidance to the traditional, data-dependent policy path.

ING: We still suspect that QE will finish at this meeting – but there are no certainties any more. What may well stay, given the increased uncertainty, is the “considerable time” phrase in the FOMC text. We may have to wait for the December FOMC meeting for any change to this part of the forward guidance.

SEB: Fed is expected to end QE3 at the meeting today. Since the QE3-program began just over two years ago, the Fed's balance sheet has been inflated by $2000bn, all in all reaching a level close to 30% of GDP. Meanwhile, the 10y rate has fluctuated between 1.4% and 3.0% (currently 2.28%). The effect on the real economy may seem limited, but unlike Europe, inflation expectations are "reasonably" close to the Fed's implicit inflation target - seems that it has been better to do too much than the other way around. This philosophy seems to characterize the Fed also going forward and the "considerable time" forward guidance will therefore probably remain until the Dec meeting. We believe that the mid-2015 hike forecast still is reasonable, but the inflation outlook may delay rate hikes.

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