Fed Forecast: No shift in tone expected in July

As the July Fed Monetary policy meeting, scheduled for Wednesday, will not be accompanied by Janet Yellen’s press conference, a revision of macroeconomic forecasts or a presentation of the dot chart, the analysts polled for the forecast report don’t see any action apart from the widely expected sixth reduction of the quantitative easing program, by another 10 billion dollars to 25 billion per month.

According to Yohay Elam, the FOMC statement “could include a more optimistic assessment of the labor market, a somewhat more concerned approach towards housing and a mention of geo-political events,” but the analyst doesn’t believe it could result in a “serious dollar rally.”

Details of the FOMC members’ discussion would give more insight into the Fed’s future moves but “won’t likely appear in the statement,” as Bill Hubard predicts, stating that we will have to wait for the release of the meeting minutes in three weeks’ time, to get the information. “That said, we see a very small chance that one or more of the hawkish voting members (there are 3) dissent in July,” the economist adds.

Meanwhile, Jamie Coleman suggests that “exit strategy discussions will intensify in the coming months but the work remains preparatory and will not be put into practice for probably another 9-12 months.”

Two crucial US economic data releases also take place this week: the second quarter GDP on Wednesday, during the FOMC monetary policy meeting, as well as the NFP numbers on Friday. The jobs report could additionally “shed some light on future changes on monetary policy stance,” as Alberto Muñoz suspects, although for now Yellen should be “comfortable with the accommodative policy.”

The FOMC will announce its monetary policy decision on July 30 at 18:00 GMT. Below you will find the full forecasts of the contributing economists.

Jamie Coleman - Analyst at FXStreet:

"It may be July, but the FOMC is expected to set off few fireworks at its upcoming meeting next Tuesday and Wednesday. No change in rates or tone is expected from the committee. They will continue to tout improved US labor markets but with plenty of caveats about ample slack remaining in that market. There may be new emphasis on wage gains and hours worked as the committee looks at a broad number of labor statistics.
There is no press conference or dot plot after this meeting, but after two days from Fed Chair Yellen recently, the market has a pretty good read on her thinking. Exit strategy discussions will intensify in the coming months but the work remains preparatory and will not be put into practice for probably another 9-12 months."

Yohay Elam - Analyst at Forex Crunch:

" The Fed is expected to taper bond buys for the sixth time to $25 billion per month. Apart from that, Yellen and her colleagues are likely to make minor changes to the statement and not rock the boat too much, especially as the decision is not accompanied by economic forecasts nor by a press conference. The FOMC statement could include a more optimistic assessment of the labor market, a somewhat more concerned approach towards housing and a mention of geo-political events. All in all, the sentiment could be slightly more positive but probably not enough for a serious dollar rally."

Bill Hubard - Chief Economist at Markets.com:  

"At the July FOMC meeting, we don’t expect any changes to current Fed policy or to their communication about future plans. The FOMC is likely to acknowledge the generally better tone to the recent data, except for housing, but continue to expect a gradual recovery toward their dual mandate objectives. The debate within the Committee will be more interesting, but won’t likely appear in the statement – we likely will need to wait for the minutes 3 weeks later. That said, we see a very small chance that one or more of the hawkish voting members (there are 3) dissent in July.

The June FOMC minutes appear to have revealed a consensus among Fed officials regarding the policies and sequencing around the exit strategy. In particular, the cessation of QEIII at the end of October, the subsidiary role of the reverse repo facility, and the delay in implementing run-offs until after the first rate hike are now largely priced into the market. Also the recent ‘mild’ core inflation and wage data are likely to reassure the fringe of the FOMC that have expressed concern about a possible pickup in inflation. Thus the market impact of the FOMC meeting is likely to be minimal.

The monetary policy path until the 30-31 October FOMC meeting is well defined, degrading current individual comments from FOMC members to background noise. However, from November onwards policy makers will have a much greater degree of flexibility in order to re-direct the policy course. This also fits with the communicated timeline regarding the details about the Fed’s future monetary policy toolbox with the FOMC poised to educate the market by year-end on how the Fed will raise rates."

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

"The upcoming Fed meeting will be one of the factors that could affect the U.S dollar this week. Though, I do not expect it will provide strong impulses. Remember that on the July meeting there is no dot-chart presented, none new macroeconomic projections and no press conference of Janet Yellen. The Fed does not like to introduce radical changes in its statement since the time when we have the meetings followed by press conferences (4 out of 8 this year, at the end of each quarter) - we can expect major changes only during those. Taking all these into account, we should only expect another cut in QE (by another $10 bln) but no more."

Nicky Ong - Co-Founder of Traders Corner:

"With Q2 GDP and an abundance of employment data due for release this week the FOMC rate meeting is expected to take a bit of a back seat. In terms of policy changes it is safe to say the Fed will taper QE by $10bn once again, bringing monthly asset purchases to $25bn per month.

Despite a positive trend in U.S Jobs growth, coupled with internal division in relation to short term interest rates, I do not expect an adjustment in their economic assessments this time around. Yellen’s dovish nature is likely to see her demonstrate patience to ensure the economy is on a stronger footing and inflation closer to target, before fuelling talk of a rate hike."

Phil McHugh - Trade Manager at Currencies Direct:

"The USD has started to show some momentum as we head towards the FOMC meeting this week and this could be the start of a longer term rally for the USD. I do not think the FOMC meeting will deliver any surprises but I think the market is sensing that the FOMC will need to turn a corner soon. It is likely that the Fed will want to wait and digest this week’s GDP and the non-farm payroll data. The FOMC are likely to confirm that QE will end following the October meeting but this is not great surprise. The key focus moving forward will remain on the health of the labour market and any signs of wage increases. In fact this meeting in the short term could be slightly USD negative as the Fed disappoints the hawks by sticking to its tact for now. Moving forward the prospect of stronger growth and a continued improvement in labour market activity should flip the rhethoric of the FOMC and lead to a sustained move higher in the USD."

Valeria Bednarik - Chief Analyst with FXStreet:

" As for the FOMC, the fact is that not much should be expected, as there is no press conference scheduled post meeting. A statement will of course be released as usual, and market expects it to confirm QE will end following the October meeting, not a surprise anymore; attention will focus particularly in any line regarding the current assessment of the labor market, a barometer of when rates will be hiked. And while labor market indicators had been for the most mixed, the main indicator, Nonfarm Payrolls, will be release after the meeting, which signals the FED will likely maintain previous meetings wording. In that case dollar can suffer a setback, on diminishing expectations of a rate hike. If the wording changes however, and the FED eases its view on employment recovery anyway, dollar will likely get a boost.

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

"Given that there won't be any forecast update or press conference after the release of the FOMC policy statement and that summer holidays are just around the corner, I would not expect any significant change in the stance of policy or any other policy innovations, maintaining the same dovish view that Yellen has been keeping during the last weeks. Probably the Non Farm Payrolls data that will be released on Friday will shed some light on future changes on monetary policy stance but at the current moment I think that Yellen is comfortable with the accommodative policy. Therefore, probably the market won't even move after the release."