Fed preview: Data dependence and dollar liquidity – Nordea

Analysts at Nordea Markets offered a brief preview of the upcoming FOMC policy decision and expect the Fed to be on hold and reiterate its data dependence.

Key Quotes:

“The overall tone of the meeting will probably be close to the December meeting, where the FOMC said it sees the economy being in a good place and that the uncertainties related to the trade war and Brexit have faded.”

“Still, the Fed will not yet declare complete victory against external uncertainties by saying that risks are skewed to the downside. The “Fed put” is not dead.”

“The strong downward signal from leading indicators is also why stick to our forecast of another rate cut in March. Admittedly, however, our forecast looks a bit stretched, as FOMC members have not sent that dovish signals lately while markets also do note price in a cut.”

“For our March cut to materialize, we would need to see some bad upcoming macro data in particular ISM Non-Manufacturing / nonfarm payrolls or financial conditions tightening too much.”

“As Powell will likely signal that the Fed is in a wait-and-see mode, the market reaction related to the “pure” monetary policy outlook should be muted. If anything, however, we see risks tilted towards lower yields as Powell will probably keep the “Fed put” alive, while markets price in a (too) low probability of easing in H1 2020, in our view.”