Fed: It is time for 'Patient' word to be replaced

Stock markets remain cautious ahead of central banks, with Fed and BoE decisions, but also the ECB’s annual conference in Sintra coming into view.

Fed outlooks led the charge, with the futures pricing in a cut as soon as July, thanks to rising tensions in the Middle Ease, elevated uncertainties over a US-China trade deal, signs that the tariffs are weighing on growth, and low inflation.

The FOMC meeting (Tuesday, Wednesday) is anxiously awaited for guidance and any signs of near term easing signals. Along with Chair Powell’s press conference, this meeting also includes a new forecasts and dot plot. A rate cut is not really in the cards, but the policy statement should support the dovish undertone.

Meanwhile, this week’s economic data should provide a neutral backdrop for the Fed as there’s nothing slated that will alter current outlooks for moderate growth and inflation trends.

As for the wider outlook, it was never expected a rate cut as soon as June, and Friday’s retail sales and production data took much of the immediate easing wind out of the markets’ sales. However, the FOMC is highly projected to throw the markets a bone in the form of a shift in language, which will be seen as a dovish twist versus the tone from May 1.

The Fed should remove the word “patient” and replace it with something akin to Chair Powell’s June 4 remark that the Fed will be “closely monitoring the implications of these developments” on trade and other matters. Ironically, the FOMC’s use of “patient” in January signaled a dovish shift, but if it was retained next week “patient” would have more hawkish connotations. Also, it will be difficult for Powell to credibly assert the softer trend in inflation is “transitory,” but he can say the Fed is “monitoring.” These factors will keep expectations alive for an easing in policy down the road.

As for QE, it’s unlikely to be changed given the trimming in the roll-off that just went into effect in May (it would not be good for credibility’s sake). And even though officials will no longer say the balance sheet is on “auto pilot,” we suspect that’s how they view it internally.

The Fed’s forecast revisions will reveal the extent to which the Fed is willing to resist market pressure to mark down their Fed funds rate assumptions in the dot-plot, and their economic forecasts as well. The new dot plot projections should show no change in the target rate in either 2019 or 2020, versus a median prior assumption of a quarter point hike in 2020. Some new estimates will likely show a rate cut this year, versus prior estimates that showed a “hard deck” at the current 2.4% rate, and Bullard may even dissent against an unchanged stance. The estimated longer run rates should be trimmed as well. Prior Fed GDP estimates low-balled the outlook for 2019, and it look like that there is room for hikes in the lower-end estimates despite renewed trade war fears.

Elsewhere, a BoJ announcement highlights a somewhat thin Asian docket, with no change seen to the current extraordinarily accommodative policy setting. In Europe, the slate of economic data should not undermine the ECB’s doves, while an appearance by the ECB’s Draghi will be closely followed for dovish leanings.