Today, the Federal Reserve (Fed) is set to announce its Interest Rate Decision at 18:00 GMT. The world's most powerful central bank is set to leave its policy unchanged after its massive monetary stimulus early in the year and as we get closer to the release time, here are the expectations forecast by the economists and researchers of ten major banks, regarding the upcoming FOMC meeting. Jerome Powell, Chairman of the Fed, will likely be asked about its recent extension of lending programs, the potential for controlling the yield curve, and how lawmakers can play their part.
“While the July FOMC meeting is not expected to see a change in the stance of policy, the Committee's assessment of risks and policy options will be critical for understanding the near and medium-term policy outlook. Most critical to assess will be whether further discussions have been had by Committee members over the potential benefits of increasing the current pace of asset purchases, should conditions warrant. Or whether a change in focus could be seen, specifically the adoption of yield curve control. Chair Powell's press conference will be the focus for assessing these possibilities. In the coming weeks, the minutes will provide additional colour.”
“We find likely that the Fed will formally adopt average inflation targeting (AIT) at some point which, if we are right, should be a clear bullish signal for equities and inflation swaps. However, the July meeting seems too premature for AIT. Consequently, an introduction of AIT at the September meeting seems more reasonable. We still expect YCC to eventually be implemented. However, just like with AIT, we think it is too soon to expect YCC in July, and September may also be too early given the fact that the Fed members pointed out some uncertainties around YCC at the latest meeting. On the economic outlook, Powell will likely say that he is happy with recent key data surprises and that the low point is probably behind us. However, he will most certainly also point out some concerns related to some high-frequency data suggesting that the strong pace of improvement in May and June may not be sustained. Moreover, the recent spikes in corona cases should also imply that risks are still tilted to the downside. On fiscal aid, Powell will likely stress how much the unemployment benefits and the household checks have helped the recovery of the real economy. Given his mandate he will not give direct advice to Congress, but let there be no doubt that he wants another package. In our view, lack of more fiscal aid does also constitute a significant downside risk to the economy. Finally, Powell will be asked about the limited uptake in the so-called Alphabet Soup facilities. However, we think he will try to dodge those questions like he did during the Senate and House hearings in mid-June. But if anything, he would likely point out that the programs have indeed provided a necessary credit backstop and therefore fulfilled their tasks of restoring market functioning.”
“Fed officials have made clear that they will be making their forward guidance more dovish and outcome-based soon, most likely in conjunction with the formal adoption of an average inflation targeting (AIT) framework when the ongoing review is completed. We don't expect those developments until after the September meeting, but the chairman is likely to continue the process of prepping markets for changes when he speaks at his press conference next week.”
“The Fed policy meeting should be something of a non-event. Their raft of liquidity injections, interest rate cuts, asset purchases and credit easing initiatives have certainly eased market tensions over recent months. Nonetheless, the economic outlook remains uncertain so they are likely to retain a cautious tone and stand willing to do more in the future if required. They may well also signal a change in their forward guidance is coming with a tolerance of overshooting the 2% inflation target - a potential key shift in their strategy from September.”
“The FOMC is likely to debate providing more explicit forward guidance linked to inflation. This could entail allowing inflation to overshoot the Fed’s 2% target to make up for past shortfalls and would fit well with the review of the monetary policy framework. Meanwhile, the Committee still has to work out a number of issues regarding yield curve control. However, the resurgence in COVID-19, increasing civil unrest and rising tensions with China make it likely that the Fed – because it does not want to cut policy rates into negative territory – will have to resort to yield curve control somewhere down the road, despite their current hesitation. A failure by the federal government to continue sufficient fiscal policy support to the real economy could speed up the Fed’s thinking process.”
“We expect the Fed, and Powell in his press briefing, to express caution about recent economic trends given the hits to activity in the short-term. We don’t expect any new policy developments at this week’s meeting, with the Committee keeping rates at the effective lower bound (ELB) and maintaining the current pace of its asset purchases. We think the Committee will discuss the appropriate tools for conducting monetary policy given that the Fed will be anchored to the ELB for some time. Members are also likely to consider how to shift policy settings to be more accommodative for September and beyond. We expect the Fed to adopt language that suggests it won’t be expecting to adjust the policy rate until it has exceeded its 2% inflation target for a substantive period. Finally, we expect Powell to again suggest that further fiscal stimulus will be appropriate. Details of CARES 2 may be known by the meeting, but if not Powell may stress the urgency of the situation given there is a sizable fiscal cliff looming.”
“In another sense though looking at the current moves in financial markets, the FOMC may have some time before having to be more explicit with guidance. While US equities hit new post-COVID highs, 10-year UST yields fell to new lows. Fed balance sheet data shows UST bond purchases have slowed to around USD 20bn per week. Add to that the disappointing take- up from the Fed’s new lending facilities and you have a recipe for an unwanted shrinking of the Fed’s balance sheet. The Fed will not want this and while the formal guidance in the statement might not change much next week, Chair Powell’s comments in his press conference may signal plans ahead. Those plans will certainly be of a dovish nature. September does look more likely for any formal outline of a policy strategy. Given the capacity for the Fed to expand its balance sheet further, we see its guidance of being fully credible and therefore having a powerful impact on capping nominal yields. The dollar is set to suffer further given the real yield backdrop although September may be the more important moment for the Fed’s guidance.”
"We expect little new information from the July FOMC meeting. Previous Fed communication has already delivered the message that monetary policy will likely be accommodative for quite some time, if not years. Although the Fed is likely to upgrade its assessment of the incoming data in May and June, the rising number of COVID-19 cases is likely to keep the committee focused on downside risk, the potential scarring of labor markets, and elevated uncertainty. Hence, we expect no real change in policy guidance and the Fed will likely affirm in the statement and press conference that its current stance remains appropriate. We think the Fed is likely to take additional steps toward the completion of the framework review. We continue to expect the Fed will shift in the direction of inflation averaging that opens to the door to make-up strategies.”
“Our US Economics team does not expect any significant policy announcements later though, instead they expect Chair Powell to set the stage for a more consequential announcement in September, likely around forward guidance, the balance sheet and the policy review later this year.”
“We do not expect any major policy changes at this meeting, although we know the Fed is working hard on strengthening its forward guidance. Based on the minutes from the last meeting, we expect the Fed to give outcome-based forward guidance, tying the Fed Funds rate to the inflation rate at the September meeting, although Fed chair Powell hinted more discussions are needed. For the same reason, we do not expect big changes at this meeting. We expect the Fed to continue to express concerns about the economic recovery not least with the indication that the recovery has halted the past month or so amid COVID-19 outbreaks in Texas, California and Florida.”
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