Research Team at BBH, suggests that the Federal Reserve Open Market Committee will gather this week and there is great confidence in the outcome of the FOMC meeting--nothing.
“This does not mean that the meeting is unimportant.
As you know, our understanding of the Federal Reserve places a heavy emphasis on the leadership: the Chair Yellen, Vice-Chairman Fischer, and the NY Fed President, who unlike the other regional Fed Presidents, has a permanent vote on the FOMC. The FOMC minutes are more comprehensive than the FOMC statement. They report on the views of voting and non-voting members, regional presidents and governors, and therefore they dilute the signal emanating from the leadership.
The statement that follows an FOMC meeting is among the cleanest expressions of the views of the Fed's leadership. It is crafted by the leadership, though it may be written in way to ensure support of as many voting members as reasonable. Dissents by Governors are rarer and understood to be more significant than dissents from regional Presidents, whose qualification for office is not economic or acumen.
The FOMC statement is likely to recognize that since the June meeting, the economy has evolved largely in line with what the Fed expected, or hoped for, as the case might be. Nearly every piece of economic data since late June has been better than expected. This includes the non-manufacturing ISM, job creation, retail sales, industrial and manufacturing output, and existing home sales. Headline and core CPI were also firmer than anticipated.
The statement is likely to recognize the resilience of the capital markets since the UK referendum. Many equity markets, including the US benchmarks, have made new highs. The drop in long-term bond yields has not fully recovered but they have stabilized. The 10-year breakeven has returned to levels above the 1.50% that were seen a week before the UK referendum. Meanwhile, the yuan, which was a source of investor angst last summer, is no longer driving the capital markets, even though its depreciation is larger and its equity market is among the worst performers this year.
On balance, the FOMC statement is unlikely to say anything that closes the door on a September move. It wants to keep the market on notice that as the Fed's objectives are approached, gradually removing accommodation is appropriate. The data dependent stance seems to mean the alignment of three stars: continued improvement in the US labor market, favorable consumption patterns, and a stable international environment.
A recent Reuters poll found about half of the 100 economists surveyed expect a hike in Q4, which really means December since the November meeting is too close to the national election. The other half is split between a Q3 rate hike (September) and sometime in 2017. That said, two primary dealers anticipate no hike until the end of 2017.
A couple days after the FOMC meeting, the first estimate of US growth in Q2 will be released. The median forecast in the Bloomberg survey is 2.6%. The NY Fed GDP tracker puts it at 2.2% as of July 15 and the Atlanta Fed tracker say 2.4%. Given that the economy appears to have gained momentum as Q2 came to a close, we suspect the risk is softer than expected growth that gets revised up, as was the case with Q1 GDP, where the final estimate was more than twice the initial projection.”
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