Fed to continue QE taper in June, Yellen's press conference in focus

Analysts taking part in the forecast report generally believe that the outcome of the FOMC meeting on Wednesday shouldn't bring any major policy surprises, with the Fed continuing the reduction of bond purchases and Chairman Janet Yellen toning down her comments after her rate hike hints stirred the markets in March.

It is expected that the Fed will continue tapering QE by 10 or 15 billion dollars a month and “it would a huge surprise if tapering was halted at any point in the coming months,” as Alistari Cotton suggests, adding that until the process is complete “Fed policy will be held steady.” “Weaker than expected retail sales and GDP readings support the case of a no change in the economic policy” as well, in the opinion of Valeria Bednarik, who also suggests that “if the Fed decides to increase the amount trimmed, market will tend to price in a sooner than later rate hike, which at the end may result in a dollar rally.”

Otherwise, attention will center on new economic forecasts, “especially those concerning the potential timing of a rate hike,” as Yohay Elam points out. Some of the analysts, such as Ilian Yotov, expect Janet Yellen to use a bit more dovish language during the press conference, as a result of which “pressure on the USD could increase.” Should the Fed head choose a more hawkish stance, “EUR/USD will probably break below the strong support area between 1.3480 and 1.3500,” in the opinion of Alberto Muñoz.

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

Ilian Yotov - FX Strategist and Founder at AllThingsForex:

"The Fed would be likely to continue tapering with another $10 billion reduction to be announced at the June meeting. However, the disappointing GDP contraction in Q1 could make the U.S. central bank's outlook and language a bit more dovish. Pressure on the USD could increase if the Fed sends a message to the markets that it is not in a hurry to hike rates any time soon."

Yohay Elam - Analyst at Forex Crunch:

"The Fed is expected to taper bond buys for the 5th time, to $35 billion / month. Recent data from the US has been positive and showed growth in jobs as well as in other sectors after the terrible first quarter. The fourth consecutive job gain of over 200K and the jump in JOLTS, a Fed favorite, are probably encouraging. Markets will likely focus on the fresh economic projections, especially those concerning the potential timing of a rate hike. The previous decision was not accompanied by a press conference, and it passed quite quietly. This was not the case in March, when Yellen said that a rate hike could come within 6 months of the end of QE and stirred markets. She might be more careful this time, but given the recent improvement, we can expect a more hawkish approach, suggesting an earlier rate hike than expected. If the hints are subtle, a full response to the FOMC statement and the press conference can only be expected in the following sessions. Contrary to April's decision, this one could have a long lasting impact on markets."

Alistair Cotton - Corporate Dealer at Currencies Direct:

"Fed policy will be held steady until QE tapering is complete, so the next few months will be a period of relative calm around its announcements. The Fed suggested in the last meeting minutes that the reduction in asset purchases will not follow a pre-defined plan, but it would a huge surprise if tapering was halted at any point in the coming months. Once tapering finishes, however, things will begin to get interesting again, because the tool the Fed used to control interest rates before the financial crisis – the Fed funds rate – might not be sufficient by itself to allow it to manage short-term rates going forward.
 
The key takeaways from upcoming meetings will be how the Fed communicates to the market what tools it has at its disposal to control short-term rates and how the wording of forward guidance changes as we move towards the first rate increase. The fine line the Fed is walking is communicating both polices  in such a way as to not spook the market into thinking rates will rise sooner than thought, which would cause an unnecessary, and potentially disruptive, global re-pricing of assets."

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

"The upcoming Fed monetary policy meeting can actually be very interesting. It should not have such a great effect on the market as the last ECB performance, but still we should pay close attention to what Janet Yellen will say. The question is if the Fed scares the stock markets because there are good reasons for that. The U.S economy is doing pretty well and yields (after a period of declines caused by the ECB policy) started to increase. There are speculations that the Fed should start thinking about interest rate hike to avoid any speculative bubbles. I do not expect that QE will be cut this time but Yellen could use a more hawkish tone on the press conference. Forecasts of the unemployment rate can be better again and the so called dot-chart (Fed members' expectations chart) could signal an interest rate hike. Despite the fact that higher interest rates could be introduced at the earliest next year, it can cause a large decline of equities."

Bill Hubard - Chief Economist at Markets.com:  

"Given the Fed’s tapering inertia and the re-acceleration of the economy since the extreme winter weather, we expect the FOMC to remain on its $10bn/meeting tapering course on 18 June. This will bring down monthly asset purchases to $35bn, from $45bn. The updated economic projections of FOMC participants are likely to lead to a hawkish shift in the policy rate projections. However, at the press conference we may see a repetition of Chair Janet Yellen downplaying the importance of the ‘dot plot’.

This meeting will include an update of the economic projections and a press conference by Chair Janet Yellen on Wednesday. We expect the Committee to taper its asset purchase program by another $10bn, evenly split between US treasuries and agency MBS. This would reduce the purchases of treasuries in July to $20bn (from $25bn) and the purchases of agency MBS to $15bn (from $20bn). This will bring the total monthly amount of asset purchases down to $35bn, from $45bn.

However, tapering is no longer a major market mover and unless there is a major change to the economic outlook, the pace of tapering is expected to remain $10bn/meeting. Instead, attention has shifted to the first rate hike. Since the updated economic projections will include forecasts for the fed funds target rate, the markets will have a new ‘dot plot’ to chew on."

Valeria Bednarik - Chief Analyst with FXStreet:

"Early past week some rumors surged the US Central Bank may accelerate the pace of tapering, cutting $15B instead of the usual $10B based on the idea that stocks stand at record highs, and therefore the impact won’t be that negative, and that unemployment rate in the US stands at 6.3% almost a six year low. But beyond that there are no reasons to believe the FED will change course this month, and another $10B cut is expected, bringing QE down to $35B a month. Weaker than expected retail sales and GDP readings support the case of a no change in the economic policy, and Yellen’s idea that despite tapering, interest rates will remain low because of the fragile economic outlook. Anyway, if the FED decides to increase the amount trimmed, market will tend to price in a sooner than later rate hike, which at the end may result in a dollar rally. A $10B cut on the other hand will be no surprise and therefore, have little effect across the board, and market attention will shift then to the statement and any tips from upcoming moves."

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

"I don't expect any surprise in FOMC statement, with the Fed announcing a reduction in monthly asset purchases by another $10 billion per month, from $45 billion to $35 billion, as well as some minor changes in its economic projections, slightly reducing growth and unemployment forecasts. Therefore the market will be focused on the subsequent press conference that Janet Yellen will hold half an hour after the statement is released. As long as she doesn't suggest that the Fed will raise interest rates before the first half of 2015, I won't expect a strong rally in the US Dollar, probably we will see some spikes just to return to the initial prices. Otherwise if Yellen surprises the market with a hawkish stance, then EURUSD will probably break below the strong support area between 1.3480 and 1.3500."