Today, the Federal Reserve (Fed) is set to announce its Interest Rate Decision at 18:00 GMT. The Federal Reserve is expected to leave its policies unchanged in its last elections before the elections and as we get closer to the release time, here are the expectations forecast by the economists and researchers of 15 major banks, regarding the upcoming FOMC meeting. The Fed also publishes new forecasts for growth, inflation, employment and rates. These projections and Federal Reserve Chairman Jerome Powell's tone are set to rock markets.
“At the Jackson Hole Symposium in August, FOMC Chair Jerome Powell made clear the Committee's intent to pursue the strongest labour market and economy possible. To improve the likelihood of achieving this aim, Chair Powell announced during his speech that the 2.0%yr inflation target would now be assessed on average over the cycle. This opens up the opportunity to run the economy 'hot' for a time to reduce or eliminate ‘shortfalls of employment from its maximum level’. Inflation in the US has disappointed for a decade and is currently below 2.0%yr. Arguably, there is then cause for the current stance to be maintained for the foreseeable future, and potentially for more easing. Updated forecasts and the Committee's assessment of risks will therefore be closely scrutinised, despite policy remaining on hold this month.”
“Overall, the uncertainty about operational consequences of AIT is still quite high, so expect Powell to be bombarded with questions on the subject. In return, don’t expect Powell to give any precise answers (for now). As the Fed needs to show full AIT commitment, we see a clear risk of a hike in the current QE pace as well as an ‘Operation Twist’. While we think that forward guidance will be linked to inflation at some point, then just before the blackout period several Fed members (Kaplan, Kashkari, Bostic, Mester and Rosengren) downplayed the chances of updated explicit forward guidance. Again, it seems like the Fed members really do not want to tie its hand and introduce any rules at this point. Still, at least some forward guidance will be offered as the Summary of Economic Projections (SEP) will be published. These forecasts now run until 2023. We expect the Dot Plot to show no rate hikes throughout the forecast horizon, with the two ‘rate hike dots in 2022’ from the June meeting likely to have migrated to 0-0.25%. This would be in line with the new AIT ‘lower for longer’ regime. We think that Powell will not hesitate to use his airtime next week to tell the politicians of the importance of more fiscal aid, despite it being a sensitive topic ahead of the election. Powell will certainly highlight the downside risks that the economy still faces, and that another fiscal package is needed to sustain the economic recovery.”
“We expect a change of forward guidance by stating that 'the Committee expects to maintain this target range until it is confident that inflation will run above 2% for some time' and to increase QE buying. We think the Fed will recognise the importance of building up credibility right away, especially as inflation expectations remain subdued.”
“The Fed has already announced the conclusions to their strategy review which shows they will now tolerate periods of inflation modestly in excess of 2% through shifting to a framework of average inflation targeting 2%. Effectively, this means the Fed will not pre-emptively raise rates before inflation has hit 2%, directly implying that interest rates will be lower for longer. The new language may well include a time factor, such as saying interest rates will not rise before the end of 2022. Or it could be outcome contingent, such as they will not raise interest rates before the unemployment rate has fallen to 5% and inflation has sustainably reached 2%. Either way, this is unlikely to be massively market-moving given the Fed’s “dot plot” of individual member forecasts suggests just two members expect rates to be raised before the beginning of 2023 – it will merely reinforce the message that the Fed really, really won’t be raising rates imminently, thereby anchoring the short end of the curve even more sturdily.”
“We don't expect specific inflation-outcome-based forward guidance in the FOMC statement yet. Officials have been suggesting that such guidance is likely soon, but that they want a bit more time before settling on details. That raises the potential for disappointment in markets, but we expect there will still be plenty of dovishness, through the incorporation of AIT in the forward guidance—without specificity—the wording on QE, the tone on the economy, the dot plot, and the press conference.”
“The Fed is still thinking about making its forward guidance more explicit. Forward guidance could be made more explicit1 either calendar-based or outcome-based. The FOMC could provide a calendar date until which it expects to keep rates unchanged, or economic conditions, such as unemployment or inflation. Given last month’s change of the monetary policy framework to FAIT, forward guidance related to inflation would seem the logical choice. Given the fact that markets do not expect the Fed to tighten monetary policy anytime soon, the FOMC may not be in a hurry to provide specific numbers or dates. It would become more urgent once we get closer to the exit from current policies. While the Fed is playing with words, several headwinds are converging in Q4 that could upset the economic recovery. A significant setback in the economic recovery would force the Fed to rethink its monetary policy stance. This could even force the Fed beyond forward guidance. Given the Fed’s aversion to negative rates, the next logical step would be yield curve control.”
“With the Fed having recently made some big changes to its Statement on Longer-Run Goals and Monetary Policy and adopted flexible average inflation targeting, policymakers will probably want to use the opportunity provided by this meeting to further clarify their new framework. In terms of actual policy, we do not expect any significant changes. Benchmark rates are down to what many policymakers see as the effective-lower bound and should remain there for a while (the new dot plot will likely confirm this prognosis). Recent communications suggest that the Fed is in no hurry to make its forward guidance more explicit, so we don’t see the central bank adopting outcome/date-based guidance just yet. We may have to wait until the publication of the Fed’s Review of Monetary Policy before that happens. As for the tone of the statement, it could be cautiously optimistic, acknowledging better-than-expected economic data, while reiterating significant downside risks. A slightly more upbeat assessment of the outlook may also transpire in the latest economic projections provided by Federal Reserve Board members. Indeed, these could show an upward revision to the 2020 growth forecast.”
“The FOMC recently updated its policy framework. It will no longer look to pre-emptively tighten policy on the basis of an expected pick-up in inflation in response to a tightening labour market. Despite the new long-run objectives, we don’t expect the FOMC to make any major announcements on forward guidance or asset purchases at its meeting this week. There will be some language tweaks to reflect the updated framework. The FOMC will extend its forecasts out to 2023. We expect the dot plot to remain flat, signalling that the policy rate will be kept at the effective lower bound until at least the end of 2023.”
“The Fed has nothing to announce on QE or rates. Its September outlook will acknowledge the faster than expected rebound in economic activity, but might not materially alter the projections for the timing for recouping what’s left. At some point, and perhaps at this meeting, we expect Fed guidance to shift from the calendar-based approach implied in the ‘dot plots,’ to the kind of economic conditionality the Bank of Canada is now using, in the Fed’s case tied to labour market conditions as well as inflation.”
“We no longer expect yield curve control to be a Fed policy tool. Following the announcement for the adoption of Average Inflation Targeting (AIT) and putting emphasis on “broad and inclusive” employment, the Fed is now seen as willing to allow inflation to run hotter than normal (i.e. 2%) in order to support the labor market and broader economy, a landmark shift to prolonged low rates era. The focus of the September FOMC will be the updated Economic Projections”.
“Expect US rates to tick a little higher toward the year-end citing an improved story (narrative) more from "meaningful progress on a coronavirus vaccine”, modest fiscal support. A key uncertainty is Fed asset purchases, look to meeting for any indication of increased buying intentions &/or switch to longer duration buying. But the Fed probably won’t target rate levels. If market rates riser the Fed would likely buy more USTs so as not to see a tightening of financial conditions.”
“Expect US Fed officials to upgrade their GDP forecast as data from early in the economic recovery comes in a little better than expected. But even with that ‘less-bad’ outcome, there are still millions of people out of work and initial jobless claims are still running well above peak levels in the 2008/09 financial crisis. Risk of virus resurgence remains, and concerns will persist that the early bounce-back in household spending will fade along with exceptional federal income policy supports. Like the Bank of Canada over the week past, the Fed is likely to remain cautiously optimistic about near-term growth numbers. Still, improvement to-date will have been far from enough to alter Fed’s accommodative policy stance in the near-term.”
“Fed’s economic projections will likely be revised higher and 2020 core PCE inflation will likely be revised closer to, but still below 2.0% while inflation expectations for 2021 will likely be left relatively unchanged around 2.0%. But unemployment rate will likely remain above any notion of full employment for several years, meaning policymakers can stick to a dovish stance to add, rather than remove, accommodation. Policymakers will also likely discuss formally adopting forward guidance (precluding a hike until inflation has reached or exceeded 2% for some time). But we see the Dec meeting as the earliest to change to formal forward guidance.”
“The Fed has made a much more significant change to its policy framework than might appear. An average inflation target means rates are not likely to rise before 2025-2027 as a base case and if the Fed struggles, rates may stay low indefinitely. We do not expect additional easing steps by the Fed to achieve the new goal, but rather a reliance on stronger forward guidance. The new framework gives a green light to Congress to spend more vigorously in the coming years. A key uncertainty is therefore how the political landscape evolves, and specifically, the outcome of the November election.”
“We don’t think there’ll be any changes to the Fed’s forward guidance on interest rates, but do see the FOMC reframing their asset purchases as being focused on providing accommodation, rather than aiding market functioning. This meeting will also feature the release of the quarterly Summary of Economic Projections, which they think should reflect a meaningful upgrade to the near-term growth and inflation forecasts. On the dot plot, they think there’ll be continued unanimous support on holding the policy rate steady through 2021, with a firm majority still seeing the policy rate at the zero lower bound in 2023.”
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