FOMC meeting to be the main event this week – BBH

According to the analysts at BBH, the combination of data and official comments spurred a sharp swing in expectations toward a rate hike on March 15 and there is no reason to think that the Fed will not deliver.  

Key Quotes

“This is taken as given now, and investors will be more interested in the updated forecasts (dot plot) and the context Yellen provides at her press conference.”

“While the last set of forecasts showed the median expectation (not a promise or commitment) that three rate hikes would be appropriate this year, the market is unconvinced.  It is discounting about a one in three chance that the Fed will deliver three hikes this year.  We suspect the market is underestimating the hawkishness of many regional presidents, some of whom will be emboldened by the resilience of the US economy as they have argued. To the extent that the forecasts are changed, we expect more dots to be raised.  We see the confidence of the Fed officials, seen in subtle shifts in their word cues, as indicative a different reaction function.”

“Previously officials needed confirmation that the recovery was resilient.  It has become convinced.  Now it is looking for appropriate opportunities.  A hawkish hike, as opposed to the past two dovish hikes, could support the dollar and spur bearish curve flattening (short-term rates rise more than long-term rates).  If the Fed statement, forecasts, and press conference fail to convince the market that a follow-up hike in June ought not to be ruled out, the dollar would likely sell off, as stale longs move to the sidelines.  A rally in bonds would likely weigh on the dollar against the yen.  Rising yields are seen helping banks and other financial institutions.  A fall in yields may see some investors shifts into other sectors.”