FOMC: No action is expected on interest rates - RBS

Research Team at RBS, suggests that the only communication following the Fed meeting this week will be the FOMC statement (released at 2 pm) while the FOMC forecasts will not be updated and there will be no post-meeting press conference.

Key Quotes

“No action is expected on interest rates, nor do we expect the Committee to use the FOMC statement to set the stage for a rate hike in September. While financial markets have rebounded quickly, the downside economic (and political) risks associated with Brexit will persist, and we believe the existence of those risks will keep the Fed on hold for the foreseeable future.

We expect few changes to the FOMC statement. The characterization of the economy can be a bit more upbeat than in June, given the generally positive news reported over recent weeks (e.g., employment, ISMs, retail sales). In particular, the strong June jobs report allayed concerns about a sharp slowing in the pace of labor market improvement, and some acknowledgement of the strong June job gain seems warranted (even though the underlying trend in payroll growth still shows some slowing).

In addition, the acceleration of economic activity (and particularly consumer spending) in Q2 noted previously in the June FOMC statement is likely to be reiterated (especially given expectations that Q2 real GDP growth may approach 3%, with real PCE rising by perhaps 4.5%). The language surrounding housing ("continued to improve"), net exports (drag has lessened), and business investment ("soft") all still look appropriate. We also do not believe the characterization of inflation and/or inflation expectations needs to (or will) be altered.

Markets will look closely to the second paragraph discussing the Fed’s outlook. We expect no changes to the Fed’s expectation for moderate growth, further improvement in the labor market, and a return in inflation to 2% over the median term. Most important, we do not anticipate that the key sentence concerning global developments will be altered. Instead, we expect the Fed to indicate once again that "The Committee continues to closely monitor inflation indicators and global economic and financial developments." Given the recent performance of financial markets, the level of concern the Fed feels over global risks could be somewhat diminished. If so, the word "closely" could perhaps be dropped.

However, we believe the Fed is still wary that the economic fallout from Brexit may take longer to materialize and so, at this time, we would not expect a significant downgrade (or the removal) of this language. If the sentence was altered (or removed) to suggest less concern about the global backdrop than in June, market participants would view that as an early signal that a rate hike may be on the table for September. Ultimately, the Fed will have limited ability to communicate its views to the market using just the July FOMC statement. More insight as to the Fed’s thinking post-Brexit will be available from the release of the minutes from the July meeting (on August 17) and Yellen’s speech at Jackson Hole on August 26.”