The following are the expectations for today's FOMC September policy meeting as provided by the economists at 25 major banks along with some thoughts on the USD into the event as provided by the FX strategists at these banks.
Goldman: We expect the FOMC to remain on hold at Thursday’s highly anticipated meeting, with risks skewed to the dovish side...We adopted a December liftoff forecast following the June FOMC meeting, largely because this seemed to be Chair Yellen’s own baseline. Recent events have further strengthened our conviction that this week is too early for a rate hike. We expect the message from the committee as a whole—including the “dot plot” and the post-meeting statement—to signal a December liftoff. Just a month ago, many officials thought that there was a strong case for an imminent move, and they have probably not changed their baseline view dramatically to date. However, we will listen closely for any hints in Chair Yellen’s press conference that she is now leaning toward a 2016 liftoff. Although most standard Taylor rules suggest that rates should rise soon, we find the arguments for a further delay—the asymmetric risk of moving too early vs. too late and the recent tightening of financial conditions— quite compelling and think they may resonate with her as well...the EUR and European currencies would be the best longs vs USD when playing for a dovish surprise. However, both the level and pace of appreciation of the USD is lower (and EUR/$ higher) going into this FOMC meeting.
Morgan Stanley: Our economics are not expecting any changes to Fed policy at this meeting and still see December as the most likely meeting for rate liftoff. However, the FOMC forecasts for growth and inflation are likely to be lowered, with a more gradual rate path projection. Overall, we see any USD setbacks resulting from volatility generated by the FOMC decision today as generating more medium-term buying opportunities against EM and commodity-related currencies.
ING: ING preferred scenario for today's FOMC rate meeting sees the Fed refrain from a rate hike, manage expectations for an October hike, but deliver a benign outcome for risk assets with a suitably gradualist/dovish outlook. This should generate a modest bearish flattening of the US yield curve. This curve move will have been a long time in coming and for many, including ourselves, has been the rationale for forecasts of a stronger dollar against the low yielding currencies. The dollar should outperform against the QE practitioners of JPY, EUR and we think now CHF as well. In short, we remain broadly positive on the dollar and retain a 1.05 EUR/USD target for year-end.
BNPP: We expect the FOMC to leave policy unchanged but keep prospects for a rate hike before year-end very much on the table with the dots still likely to suggest one hike by year-end. However, markets will remain reluctant to price this amid scepticism that data and market conditions will be any more conducive to tightening in December than they were this week. Heading into the meeting, BNP Paribas positioning analysis shows net USD positioning is nearly flat for the first time since the summer of 2014. The collapse of the bullish USD consensus position built up over the course of H2 2014 has been gradual but relentless, and suggests only modest USD downside risk from the Fed, despite our expectation for a neutral-to-dovish outcome. While the USD may retreat a bit, we would expect recent ranges to remain intact. We think risk reward remains attractive for staying long USDJPY and USDCAD into the meeting, in anticipation of gradual gains in those pairs in the weeks ahead or, less likely, more immediate upside if the Fed surprises hawkishly.
RBS: RBS forecasts the FOMC will hike the target range for the Fed Funds rate by 25bp. Along with a hike, we anticipate the forecasts and language may be used to reinforce an extremely slow pace of tightening and a purely data-dependent outlook for the Fed Funds rate. A result in line with our expectations would support the USD, in our view – monetary policy divergence remains a theme, even as all central banks feel the global dovish pressure of softening EM growth.
Danske: Given that we look for no hike in September and consequently think the FOMC will take the 2015 median Fed Funds ‘dot’ down to signal just one hike this year and lower the end 2016 median rate ’dot’, we believe the USD will come under pressure near term given that the market is pricing a non-negligible probability of a hike this month (some 25%). Looking at the betas from our Danske Bank Short-Term Financial Models, we observe that EUR/USD appears most sensitive to relative rates (2Y swap spread) among the G3 currencies and although a positive beta to risk appetite (Vix volatility), as mentioned above, complicates the near-term outlook, we judge that EUR/USD on the margin is in for a short-term bounce on a softer Fed. Given that both JPY and EUR currently trade as safe havens and that beta to risk appetite (Vix volatility) is identical for EUR/USD and USD/JPY (but opposite sign), we also expect USD/JPY to remain under pressure in the very short term...Thus, clients should buy USD/JPY if one wants to position for a hawkish Fed and buy EUR/USD if positioning for a softer Fed (our call).
Deutsche Bank: We expect the Fed to hold off on raising the federal funds rate at the conclusion of this week’s FOMC meeting on Thursday. However, we expect Chair Yellen to emphasize in the press conference that depending on near-term economic and financial developments, a rate hike very much remains a possibility at either the October or December FOMC meetings. The lack of a press conference at next month’s meeting should not be an inhibitor to a rate hike; Yellen could remind the public that she could always call an impromptu press conference. With respect to the meeting statement, we anticipate only cosmetic changes to the opening preamble discussing the intra-meeting data developments. However, the forward guidance language could be problematic. Regarding the Summary of Economic Projections, the FOMC will likely raise its near-term growth forecast, lower its estimate for the unemployment rate, but at the same time modestly reduce its inflation outlook. This could result in a slightly lower estimate of the non-accelerating inflation rate of unemployment (NAIRU). In turn, we expect the median fed funds forecasts to fall. (for more on DB's view, see here).
Citi: Citi’s baseline is for a 25bps hike, but there remains considerable scope for surprise, as well as hifting communication to play a role. Ultimately we think the decision boils down to how the FOMC sees market conditions, and whether the recent volatility could lead the FOMC to temporarily postpone hiking/ In our view we place a 25% chance of a hike, and 75% for no hike. Still, the risk/reward favors a more hawkish outcome. We think the next most likely possibility would be for the committee to signal the October meeting as live, a hawkish outcome for the bond market. Impact on markets: 1- If September hike - Buy USD/CAD. If September skipped - Buy AUD/JPY. (for more on Citi's view, see here).
BofA Merrill: Fed hiking remains the base case for Bank of America Merrill Lynch. Consider the potential outcomes: 1- The FOMC hikes as we anticipate. The gap between the revised dots and market pricing should remain wide. This risks a modest sell-off but not another tantrum, in our view. 2- The FOMC makes a tactical delay in anticipation of calmer markets. In this case, we think October is much more likely than current market pricing, which has just an 11% incremental difference from September to October. 3- Despite downplaying low inflation for some time, the FOMC decides not to hike for this reason. This would reinforce current market expectations for an extremely slow pace — even if the dots say otherwise. Notice that the first two are hawkish, while the last is a recipe for elevated uncertainty. FX: USD can still rally after Fed hikes: "1- With Overnight Index Swap (OIS) contracts implying a 30% chance of a September hike, and over a 90% chance of 1 hike in 2015, the USD will rally in a hike scenario, even in the case of a “dovish hike” which our Rates team sees as already priced. 2- But, outside of pure market expectations, the immediate reaction of the dollar to Fed hikes will be a function of several factors: (i) risk sentiment, (ii) pace of hikes going forward, and (iii) China. (for more on BofA's view, see here).
Credit Suisse: Our central view for the September 16-17 FOMC meeting is for no hike, and that we may see forward guidance hinting that a hike is being considered for the October or December meetings. This week is considered a close call though. If domestic data alone were the issue, we'd be inclined to lift off in September. But the timing of policy lift-off has become largely contingent on global conditions and financial market volatility, and in their view, these have combined to more than offset the good domestic news. As a result, the balance has tipped towards no rate hike on September 17. Our baseline forecast assumes a December 16 lift-off. In FX, We remain bullish on the USD. While an FOMC decision with no hike and no signal of upcoming tightening could cause the USD to temporarily lose some ground against other G10 currencies, we think the poor growth outlook in the EM world would make any USD sell-offs short lived, in our view. We remain broadly long USD in our portfolio. (for more on CS' view, see here).
SocGen: The FOMC announces its policy decision at 7p.m BST, with the market priced for a 30% chance of a hike. A clear message that a hike is ‘on its way’ is expected, so inaction today will likely only have a significant impact if the message is more dovish than that. A 25bp rate hike would be a surprise to the market (though not to SG Economists) but the biggest surprise of all would be failure to lace any decision with dovish undertones. The consensus also looks for the Fed’s famous ‘dot path’ to be lowered, though we don’t think that’s likely, just yet. Whatever today’s decision, the pace of rate increases from here will be slow and cautious and the final destination will be extraordinarily low relative to the peaks we have seen in the last 40-odd years (13% in 1974, 20% in 1980, 11.75% in 1984, 9.75% in 1989, 6% in 1994, 6.5% in 2000 and 5.25% in 2007). We’ll watch the 10-year EU/US yield differential to gauge how EUR/USD should react, while the move in short-dated US rates will be more important for the dollar’s near-term performance against AUD, NZD, CAD. Finally, if global equity markets stumble, the yen will out-perform (for more on SocGen's view, see here).
Credit Agricole: Ahead of the September FOMC meeting, CA expects the Fed to postpone lift-off to October, revise lower its projections for the median Fed funds rate path and core PCE but upgrade its outlook for growth and employment. So, how to trade the Fed? USD longs funded in low yielding currencies like CHF seem still attractive in our view. A Fed hike could boost the USD but may not necessarily trigger a sharp risk selloff. As a result the likes of EUR, CHF and JPY need not receive a massive boost. We like being long USD against CHF in particular because the positive correlation between CHF and risk aversion has been weakening recently. If the Fed doesn't hike and signal a lower glide path for Fed fund rates while downgrading its core inflation and unemployment projections, chances are that risk appetite could recover some more. While we could see investors unwinding decoupling trades and USD underperforming, we doubt that this will be sustained as markets will continue to see any decision to keep rates unchanged as delaying the inevitable. Under this scenario, the USD may lose some ground against EUR, CHF and JPY initially but the underperformance should be ultimately capped by the prospects for more policy divergence (eg more ECB QE) and resilient risk appetite.
Barclays: We expect a mild correction in the USD mainly due to our expectation of Fed’s inaction on its September 17 meeting this week. Although we continue to see economic activity in the US as solid and justifying modest rate hikes, we believe the Federal Reserve is unlikely to begin a hiking cycle in this environment of high volatility and uncertainty in global financial markets. Furthermore, with Fed Fund futures pricing only around one-third of a chance for a hike, it is unlikely that the FOMC would want to surprise the market on the hawkish side and push the USD further after it has appreciated more than 7% YTD. We continue to expect USD outperformance in the months ahead as doubts about the health of the Chinese economy and the implications of a weaker CNY continue to weigh, particularly in EM currencies.
Nomura: We are expecting the FOMC to raise rates for the first time in December. We do not expect the Committee to endorse a more rapid pace of interest rate adjustment after liftoff. Consequently, the delay in liftoff should imply a lower path of rates over the whole forecast horizon. We also think that the downward adjustment of the rate path is consistent with the recent tightening of financial conditions. We think that those changes in financial conditions will primarily be reflected in the FOMC participants’ paths of interest rates rather than their paths for growth and inflation. Finally, we will hear from Chair Yellen in her post-FOMC press conference. We think Yellen will stress that the FOMC is getting closer to raising rates and that the Committee expects to raise rates this year. We expect her to acknowledge that downside risks have increased and those had played a role in the Committee’s decision. We expect her to reiterate that the Committee’s future decisions will continue to be sensitive to how the outlook for the economy and inflation evolves and that the pace of interest rate adjustment, once it begins, is likely to be slow and data dependent.
UBS: Whether the FOMC will increase the Fed funds rate target at its upcoming meeting remains a close call. We think domestic economic momentum—including the latest reported rise in job openings—argues for a hike. However, financial markets remain somewhat unsettled and foreign strains are uncertain. We think there is a 60% chance of a rate hike.
BTMU: The US dollar continues to remain on the defensive heading into the FOMC meeting. Even the recent adjustment higher in US short-term yields ahead of the FOMC meeting has failed to offer support for the US dollar. The disappointing performance of the US dollar may in part reflect nervousness that the Fed could deliver a dovish surprise today. However with the US interest rate market already discounting a very gradual profile for Fed rate hikes in the coming years, there appears limited scope for a dovish surprise. The implied yields for the December 2016 and December 2017 Fed funds futures contracts are already at just 0.87% and 1.43% respectively. The Fed is unlikely to signal that rates will rise even more gradually. The main negative risk for the US dollar in the near-term which could weigh modestly would be if the Fed signalled that it is now unlikely to raise rates this year. Back in June, fifteen out of seventeen FOMC participants expected the first rate hike this year. We are assuming that the Fed will signal it remains on course to raise rates this year offering support for the US dollar against the other major currencies. The US dollar already appears modestly undervalued heading into the FOMC meeting according to our short-term valuation models which will help to dampen potential downside risk as well.
JP Moragn: The FOMC meeting is a very close call - we view it as essentially a coin flip. The economic data present a clear case for the Fed to begin the normalization process this week. However, the recent financial market turbulence complicates he decision. We think in this environment the best policy is for the Fed to hike this week with communications that reinforce its message that it is the pace that matters, and the pace will likely be gradual and responsive to changing risks
CIBC: In economic outlooks, as in baseball, a tie goes to the runner. We’ve been running with a forecast for a September Fed hike for the last few months, and we’ll stick with it given that the odds of such a move appear pretty close to even at this point. The difference to the economy of having the first rate move in September, October or December is negligible. If the Fed passes on a September hike, it will further tighten the language to reinforce expectations that a move is still highly likely this year. If it raises rates, it might add a line saying that it will be “patient” in terms of subsequent moves, virtually ruling out an October move in the process. For anyone other than money market traders, these are not radically different outcomes.
RBC: We are holding out hope the Fed will hike at this month's meeting, but recognize the odds are painfully low and this committee has shown an unnatural sensitivity to global aesthetics
SEB: WE EXPECT FED TO DELIVER. We predict the Fed will raise rates (the interval) with 25bps today, with a possible guidance down towards the lower end (0.25%). The Fed said in July that they were looking for “some further progress” in the labour market before raising rates. The two employment reports since then have met that criterion, and with the unemployment rate now sitting at 5.1% the labour market part of the Fed’s dual mandate arguably is achieved. The decision is, however, a very close call: core PCE inflation is at a 4y low and Chinese/EM growth concerns with turbulence in financial markets could argue for leaving rates unchanged. While market pricing do not support the increase, the Fed has certainly communicated it’s ready for liftoff. With respect to the dot plots, we think the new median forecast will suggest only one 25bps hike this year and three hikes in 2016. Further increases will be very gradual and data dependent. Hence, a hike today should be accompanied with a dovish statement.
ABN AMRO: We expect the FOMC to hold fire on Thursday. In the run-up to the meeting, the economic data released has been positive on many fronts, including the labour market, consumption and overall GDP growth. Although inflation and wages have been below expectations, the pace at which the slack in the labour market has been diminishing suggests that both could accelerate in time. Perhaps a larger concern for the Fed is the recent turmoil in financial markets associated with downside risks to EM growth. The Fed will probably want to wait to get a better assessment. The impact of this on the Fed forecasts will be reflected in the dot plot.
Westpac: We expect the US Federal Reserve to start raising rates this week (the first time it has instigated a tightening cycle since June 2004). The market is not prepared for this historic event. We have been forecasting that the FED would start raising rates in September 2015 for around two years. It has been a long wait and, despite market pricing only giving a 30% probability to the hike occurring, we are sticking with the view.
BMO: We judge it’s a close call whether the FOMC hikes rates or not. Instead of flipping a coin, we’ll side with what we judge the Fed “should” do, which is liftoff, and be “nobler in the mind to suffer the slings and arrows” of the stand-pat siders. Given the trumping importance of the labour market, improvements here are becoming increasingly inconsistent with near-zero policy rates.
Wells Fargo: There is a significant uncertainty in the marketplace regarding whether or not the Fed will opt to raise its policy rate for the first time in nine years. This past week’s data, in our view, should not dissuade the FOMC from moving ahead with a 25 bps increase on Thursday. The July Job Openings and Labor Turnover Survey (JOLTS) added to the “some” improvement in the labor market that the FOMC members have been looking for. Job openings increased an impressive 430,000, pushing the total number of job openings to a series high of 5.75 million. Although the openings data clearly show significant improvement, total turnover in the labor market remains weak. Gross hiring and separations fell in July. Involuntary separations and quits fell during the month, but the quit rate held steady at 1.9 percent. The quit rate has declined slightly over recent months, which may give some FOMC members pause about raising rates.
Commerzbank: We expect this to be a close call. If the US central bank stays true to its line, it is on balance likely to sit tight this time. In our view, it is more likely that the Fed will again underline the basic expectation of a near-term turnaround on interest rates but postpone the first step until December. This would be essentially continuing the policy of past years.
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