Federal Reserve Preview: Forecast from 11 major banks

The Federal Reserve is set to announce its final decision of the year at 19:00 GMT and as we get closer to the release time, here are the forecasts by the economists and researchers of 11 major banks regarding the upcoming central bank's decision. Markets are watching changes in its bond-buying scheme amid the recent virus surge and economic slowdown. Nevertheless, the bank may opt to wait until the next meeting. Special attention will be given to the new economic forecasts, especially growth and employment. 

Ahead of the meeting, the dollar remains on the back foot after a cheerful Tuesday in markets.

Nordea

“The Fed is annoyed with Steve Mnuchin's decision to veto against the prolongation of the crisis measures and this is maybe the best reason to expect the Fed to add stimulus via a Twist operation despite several FOMC-members acknowledging a brighter medium-term outlook. A Twist operation will likely only dampen the (marked) latent steepening pressure in the USD curve. We also think that the Fed intends to launch a set of guiding principles on how long the asset purchases will run for. These principles will likely be linked to PCE prices and unemployment.”

Citibank

“We see some hawkish risks at this week’s FOMC. The team sees only a 25% chance of the Fed extending maturity of its Treasury purchases. We expect FOMC to introduce qualitative guidance that asset purchases will continue at the current pace until the US has weathered pandemic. While phrased dovish, this sets the committee up to taper asset purchases – we expect a taper to be announced in Sept 2021.” 

Rabobank

“The FOMC is most likely to elaborate on its forward guidance on asset purchases at the December meeting and leave decisions on the horizon, pace and composition of the asset purchase program to future meetings when more clarity is available on the fiscal policy support that the Committee has been asking for repeatedly.” 

ING

“Our team expect a dovish message to be maintained as well as perhaps some forward guidance on the Fed’s asset purchases. The Fed is an experienced communicator and we doubt it will make any mistakes over misconstrued words on premature removal of stimulus.”

TDS

“We expect Fed officials to follow through on their recent discussions about making QE more accommodative. At a minimum, the statement is likely to include new forward guidance language to make clear that QE will continue until there is clear-cut progress toward the employment and inflation goals. We expect a lengthening of the weighted average maturity (WAM) of purchases as well, although that is a closer call. All else equal, the moderately dovish outcome we expect implies near-term headwinds for the USD immediately surrounding the Fed's policy announcement. We think these should remain temporary, however, as recent USD weakness looks overdone.”

NBF

“With benchmark rates down to what many policymakers see as the effective-lower bound, we don’t expect any changes on that front. The big question is whether the Fed will tweak its asset purchase program. Some analysts suggested the Fed might use this meeting as an opportunity to shift QE toward the longer end of the yield curve, thereby providing more stimulus to the economy. We do not expect such a move from the Fed. Recent communications suggested the central bank still viewed its QE program as providing substantial support to the economic recovery. Although the rise in COVID-19 cases could temporarily slow the rebound, positive announcements about vaccines point to more solid growth in the second half of 2021. It’s not clear that the economy will require more stimulus in this context, especially if Congress can come to an agreement for a new fiscal stimulus.”

Deutsche Bank

“We expect the FOMC to maintain the current pace and composition of asset purchases. The most important innovation for this meeting is likely to be an enhancement to the QE guidance by adopting qualitative outcome-based language. On top of this, the latest Summary of Economic Projections will be released, where our economists expect there to be upgrades to the growth and unemployment forecasts. However, with a persistent shortfall in core inflation and uncertainty over the virus and the fiscal outlook, the median assessment of the federal funds rate should be unchanged through 2023.”

ANZ

“Downside risks to the short-term outlook have risen, while good news on a vaccine has raised optimism about the outlook in the latter part of 2021. This divergent outlook will weigh on Fed policy deliberations. Ultimately, we think the recent deterioration in labour market conditions will prompt the Fed to consider more accommodation. We expect it to tweak the duration of its asset purchases toward a higher proportion of longer-dated securities. FOMC officials do not appear to have reached a consensus on conditional-based forward guidance on its asset purchases. We anticipate Chair Powell will field many questions about how the Fed’s balance sheet might evolve.”

CIBC

“The Fed will at some point make adjustments akin to what the Bank of Canada has done in its QE program (extending maturities while buying less in total) but we aren’t expecting that to be announced this week, leaving the FOMC meeting as a non-market-mover.”

Credit Suisse

“We believe there is no need for the Fed to pull the trigger on more easing through extending the duration of each month’s $80 B Treasury purchases, given the positive news on vaccines and the sharp rise in US long-term inflation breakevens. But we also feel the Fed will keep very much alive the possibility that it will take such a step without hesitation in 2021 if it’s deemed necessary, even if actual inflation takes a step higher in early 2021. We still cannot rule out the possibility that the Fed could use the excuse of likely new lockdowns in coming weeks – and the resulting risk to growth – to push through another round of easing via increased asset purchase duration anyway. As such, we feel that to the degree the Fed meeting poses an event risk to markets, it may actually be asymmetrically biased to the upside by generating a more dovish than expected outcome, thereby keeping the USD on the back foot.”  

Danske Bank

“We think the Federal Reserve will stick to its game plan without any major changes. We may see the Fed changing its QE forward-guidance to outcome-based forward guidance but we think the Fed will continue buying at current pace for some time. The fact that breakeven inflation expectations continue to move higher, which is the main reason why the US yield curve has steepened, means that there is little pressure for the Fed to do much. Risk is, however, that it will do a 'twist' by buying US Treasuries with longer maturities, which is likely to lead to even lower US real rates.”