Federal Reserve Preview: Forecast from 19 major banks

The Federal Reserve is set to leave its policy unchanged but publish closely-watched forecasts for growth, inflation, employment and interest rates. Markets foresee an earlier increase in borrowing costs than the Fed and fear a bump up in inflation. 

Federal Reserve Chair Jerome Powell will hold a press conference at 18:30 GMT and will try to balance between acknowledging the vaccine and stimulus-led recovery without raising concerns of overheating and rate hikes.

As we get closer to the release time, here are the forecasts by the economists and researchers of 19 major banks regarding the upcoming central bank's decision.

Capital Economics

“We expect the Fed to leave policy unchanged at its mid-March meeting, though officials will try and use the statement and updated economic projections to push back on market expectations that rate hikes are rapidly coming into view. In line with recent comments, we expect Chair Jerome Powell to sound relaxed about the recent rise in longer-term bond yields, though he is likely to leave the door open to intervening if yields were to rise substantially further.”

Westpac

“We expect that, while some members of the Committee will look to bring forward their anticipated timing for the first fed funds rate hike(s), the median will remain at or very close to zero to the end of the forecast period. While not included in the forecast table, any guidance on triggers for the tapering of asset purchases will also be closely scrutinised.”

TDS

“Fed officials are likely to raise their 2021 growth projections sharply. We expect changes to inflation and funds rate projections to be much more modest, however; the median "dot" will probably still show no tightening through end-23, and the tone will likely remain dovish. That said, the mean dot will probably move up slightly, and we don’t expect officials to signal any major problem with the recent backup in bond yields.”

RBC Economics

“The US FOMC announcement will likely reiterate that the central bank is in no rush to withdraw policy support despite further improvement in the economic backdrop. The accompanying economic projection will likely be upgraded as well, given stronger near-term data and better medium-term outlook. Their latest projection had the economy growing 4.2% in 2021, well below RBC’s 6.2% forecast.”

NBF

“While we don’t expect any change on either the policy rate or bond buying, an updated Summary of Economic Projections should reflect substantial improvements to the US outlook relative to its December meeting. Notably, December’s median projection for 2021 GDP growth of 4.2% is significantly below our own updated 6.6% growth expectation. As part of the updated SEPs, there will be a new dot plot, which should show at least some FOMC participants moving policy rate tightening expectations into 2023. Even with the Fed’s new flexible average inflation targeting framework, we think the more optimistic outlook makes it difficult to justify showing no tightening through the forecast horizon. As for the tone of the message, we expect Powell to continue to argue for a patient, cautious approach going forward. While he’s unlikely to push back against the rapid interest rate increases over the past couple of months, he will likely remind markets that the coming rise in inflation is (in the Fed’s view) transitory. He might also highlight that the labour market is still far from full employment, a fact which argues in favour of maintaining accommodative policy longer than would otherwise be the case.” 

Deutsche Bank

“The Committee is likely to update their economic projections with a substantial upward revision to expected growth, a lower unemployment forecast and a modestly higher inflation trajectory following the passage of President Biden’s $1.9tn COVID-19 relief package. Despite this, Chair Powell is likely to emphasise that significant uncertainties remain and that the recovery has a long way to go, particularly the labour market. Powell is also likely to reiterate that any discussion of tapering is ‘premature’ and that it will likely be ‘some time’ before the Committee can even assess if their goals have been achieved. On the topic of rising yields, he will likely once again emphasise that the Fed has the tools to deal with issues as they arise and that they would respond to disruptive or persistent tightening of financial conditions as necessary. It’s fair to say it’s a pivotal meeting though.”

BBH

“We expect another dovish hold, with Powell underscoring that Fed policy is going nowhere anytime soon. With the US economy surging, we suspect the Fed can do little to keep rates down and so the dollar is likely to continue benefiting from rising yields as a result.”

ANZ

“The FOMC’s GDP forecast for the current year is likely to be upgraded significantly. We also anticipate the Fed to forecast an acceleration and then easing in inflation. And, there is more than an insignificant chance the median Fed member pencils in a rate hike for 2023. We don’t anticipate any change to the FOMC’s forward guidance on rates or asset purchases. We expect Powell to reiterate that the recent rise in long-term yields reflects better growth prospects, and to reinforce the view that maximum employment is far away so the Fed can be patient.”

DBS Bank

“The Fed will probably upgrade (for the third time in a row) it’s growth and inflation forecasts. While they have refrained from pulling forward rate hike expectations into 2023 thus far, we suspect that they might indicate in the dot plot that one hike in 2023 is possible at this meeting. Communication will be tricky as the market has already frontrunner tightening with 5Y yields already above 0.8%. We suspect that the Fed will try to dampen down rate hike expectations but may not sound too concerned about the rise in longer-term yields.”

UOB

“We continue to hold the view that the Fed will keep policy rates at the current 0.00%-0.25% region at least until 2023. This is premised on the continued successful rollout of vaccinations, as well as more fiscal stimulus in the coming months.”

CIBC

“The Fed will likely nudge up the interest on overnight reserves by a token 5 bps, to keep some short-term rates off of zero in the face of too much liquidity at the front end, but that’s a technical adjustment, not a policy tightening. Their substantially improved forecast shouldn’t surprise the bond market, particularly if they only move a few rate hikes up into 2023, and put a lot of emphasis on the currently tame trend in core PCE prices.”

MUFG

“Fed Chair Powell will have a difficult task in dampening down the enthusiasm for selling UST bonds. The scale of GDP growth will be underlined by the Fed’s own revisions. In December, the Fed’s projection for growth this year was 4.2%; and the unemployment rate at 5.0% - both will be revised considerably. The Summary of Economic Projections will also include the DOTs profile and this too could see some notable shifts from FOMC members in their views on the timing of rate increases ahead. Four FOMC members will need to shift their view on a rate increase in 2023 in order for the median to move to 2023 rather than 2024 for the timing of the first-rate increase. Whether that happens or not there will still be a clear shift forward in members’ timing of rate increases. Our sense is that Powell will focus on employment, not GDP growth, in order to justify an ultra-dovish stance. 9.21M jobs need to be created in order to reach the pre-covid employment level. But 15.7M jobs need to be created by year-end in order to reach the employment level that would have been achieved if covid had never happened and trend employment growth had continued this year. Overall, we think Powell has a difficult task altering the momentum of US rates and the US dollar.”

Credit Agricole

“We think the FOMC will maintain its cautious inflation outlook even as it presents its upgraded economic projections. Moreover, we believe that the updated Fed dot-plot would largely reaffirm the view that policy rates will remain at their current low levels in the coming years. A more dovish-than-expected outcome from the Fed meeting can boost risk sentiment and weigh on the USD vs risk-correlated and commodity currencies.

Citibank

“This week is likely to see the FOMC significantly revising up their US growth forecasts, downwardly revising US unemployment and modestly nudging inflation up in 2022 and beyond. This suggests some, but limited, upward movement in Fed ‘dots’, possibly for one hike in 2023, but it is more likely that 2023 continues to show zero hikes. We think it may be too early for the Fed o signal ‘substantial further progress’ – the criterion for tapering asset purchases. But equally, we do not expect pushback on rising rates either. 

Societé Generale

“The FOMC will talk dovishly, nudge the IOER up to keep Fed Funds on their 0-0.25% band, but probably won't do anything to directly help the long end. So, no cavalry to the rescue for bonds.” 

Rabobank

“The FOMC is likely to upgrade the economic outlook and its economic projections now that economic data have improved and the American Rescue Plan has been signed into law. At the post-meeting press conference, Fed Chair Powell will have a difficult job pushing back against market expectations of higher inflation and earlier policy rate hikes. An upward shift in the dot plot could make his job even more difficult. Even if the rise in yields in itself would not be a problem to the economic recovery, it could cause cascade effects that would warrant intervention by the central bank. If pushing back verbally against market pressures does not suffice in the coming days and weeks, the next step for the Fed could be an adjustment to the asset purchase program. If the reflation trade really gets out of hand, the FOMC may be forced to revisit the option of yield curve control.”

ABN Amro 

“We expect a significant upgrade to growth forecasts to something near our own (we expect growth of 6.2% Q4/Q4 for 2021, compared to the Fed’s December projection of 4.2%). PCE inflation should also get an upgrade for this year given the jump in oil prices, but expectations for 2022 and 2023 will likely remain around 2%. We expect the median FOMC member to pencil in one rate hike in 2023; notably less than the 2.5 hikes implied by financial markets. We think projections pointing to no more than one rate hike in 2023 should still have an anchoring effect on the market, thereby keeping a lid on further yield rises. We see room for short-term rates 2y ahead, in particular, to fall back, reflecting reduced rate hike expectations.”

SEB Bank

“Today's meeting will still be exciting as the Fed presents its new forecasts for GDP, inflation and the policy rate. Improved growth prospects should be reflected in a substantial upward revision of the growth outlook, especially for this year, as well as a downward revision of unemployment. However, it is too early for the Fed to change its view of inflation and interest rates. We believe that the median forecast for inflation will remain at 2% and that the policy rate will remain unchanged in the range of 0.00-0.25% until the end of 2023.”

UBS

“There are two main things to watch when the meeting concludes. First, the FOMC will release updated economic projections for the first time since the December meeting. A major upgrade of forecasts is in order. The market is likely to focus on the dot plot, which indicates member expectations for the path of the Fed's policy rate. Back in December, five of the 17 dots showed a rate hike by the end of 2023, and that number is almost certain to increase. If a majority of dots show a hike this time, it would represent a step back from the Fed's ‘lower for longer’ stance. However, markets are already pricing in rate hikes by 2023, so this might not trigger much of a reaction. Second, markets will watch Fed Chair Jerome Powell's news conference closely for any hints on future policy changes, especially in regard to Fed asset purchases. In particular, markets have been looking for Powell to push back against the recent rise in Treasury yields. So far he hasn't, but today is another opportunity to do so. In the other direction, up until now Powell has been saying that it's too soon for the Fed to start thinking about tapering its asset purchases. We expect him to maintain that stance, but a change in messaging could trigger a big market reaction.”