FOMC Preview: 11 major banks expectation from December meeting

We are closing into the FOMC’s December policy decision and as the clocks tick closer to the decision timing, following are the expectations as forecasted by the economists and researchers of 11 major banks along with some thoughts on the future course of Fed’s action.

Most economists and analysts expect the Fed to raise the Fed funds target range to 1.25-1.50%, which will mark the third rate hike for this year. While no changes are expected to policy, focus is on the updated projections and Janet Yellen’s press conference.

Goldman Sachs

FOMC almost certain to deliver the third rate hike of 2017. Attention is likely to focus on the outlook for 2018 and beyond. In particular on how the Federal Reserve will react to a tax reform that now appears likely to become law.

We expect the Summary of Economic Projections to upgrade GDP growth in 2018 and 2019 and to mark down the unemployment path by two-tenths to 3.9%, offset only partly by a one-tenth reduction in the longer-run unemployment rate to 3.5%. We expect the 2018 inflation projections to remain at 1.9%. We continue to expect four rate hikes next year.

Danske Bank

We expect the Fed to raise the Fed funds target range to 1.25-1.50% at today’s meeting, in line with market pricing and other analysts. As a rate hike is fully priced in, it is by itself not a market mover and focus is on the updated projections and Janet Yellen’s press conference for more information about the director for next year. Right now, it seems like the Fed is on autopilot although it has become slightly more concerned about the persistent low inflation. Hence, we do not expect any major changes to the ‘dots’ for next year, which are likely to continue signalling three hikes. The projections for inflation, growth and unemployment are usually less important, which we expect to be broadly unchanged, except for unemployment, which will be revised down, as the current rate of 4.1% is what the FOMC thought would be the level by year-end 2018. We may see a further decline in the Fed’s NAIRU estimate, which is currently 4.6%. Another question for next year is whether we will see further downward revisions to the longer-run dot (which is the Fed’s median estimate of the natural rate).

Nomura

• We expect the FOMC to raise targets for short-term interest rates for the third time this year. This will bring the RRP and IOR rates to 1.25% and 1.50%, respectively. This policy change has been well telegraphed over the past several months as participants have frequently acknowledged continued economic momentum, tightening labor markets and, over the past two months, increased evidence that the inflation weakness earlier this year was likely transitory.
• Consistent with sustained economic momentum and strong incoming data during the September-December inter-meeting period, we expect real GDP growth forecasts for 2017, 2018 and possibly 2019 to be revised up. The unemployment rate for November, at 4.1%, sits a comfortable 0.2pp below September’s end of year SEP forecast for 2017. Thus, we expect the Committee to lower its median unemployment rate forecast not only for 2017 but also later years as well, including the longer-run. Finally, steady growth in core PCE inflation readings from September and October indicate that the SEP inflation forecasts are likely to remain unchanged at the December meeting.
• The distribution of the dots in the December SEP contains a higher-than-usual amount of uncertainty, in our view. Strong incoming data with positive momentum combined with the increased likelihood of a fiscal impulse via tax cuts will likely prompt some participants to pencil in more hikes in 2018 than they had expected at the September meeting. However, at the same time, the upcoming leadership transition as well as lingering uncertainty around the composition and trajectory for changes in Federal taxes and spending could give enough members pause to keep the current 2018 outlook of three hikes unchanged. Reflecting this increased uncertainty, we expect the distribution of the 2018 dots to shift up but that the median will fall between three and four hikes. This implies that, with 16 participants, the median, conventionally measured, will be 2.250%, the average of 2.375% (four hikes) and 2.125% (three hikes, its current level)

TDS

With markets fully priced for another 25bp rate hike, focus will be on the normalization pace in 2018 — particularly the dot plot. Our base case is for no change in the 2018 median dot, but we do see risks for the distribution to skew higher. Conversely, there is also some risk that markets may take a dovish signal should Yellen’s final press conference suggest some further concern about persistently low inflation.

• Rates: Treasury investors will focus on the Fed’s tone regarding the pace of hikes, their tone on inflation, the reaction to fiscal easing, and the terminal rate for direction.
• FX: Despite two-sided Fed risks, with so much priced in we look for a modest correction in the USD, especially if caution on inflation is reinforced.

Rabobank

The Fed seems intent on hiking in December, despite admitting that it does not have a clue why inflation remains absent. In fact, it is clinging to the belief that wage and price pressures will strengthen as slack in the labor market continues to decline. Of course, delivering a third hike before the end of the year would fulfill the Fed’s promise contained in the dot plot for the first time since the start of the hiking cycle. In 2015 and 2016 the Fed had to backtrack on its promises, so now they seem intent on restoring the credibility of the dot plot. Therefore, at the meeting on December 12-13 we expect the FOMC to change the target range for the federal funds rate to 1.25-1.50%, from 1.00-1.25%. Since this hike has been well telegraphed by the Fed, markets are likely to focus on the fresh set of projections, in particular the dot plot. Do the FOMC participants still expect to hike 3 times in 2018? The meeting will be concluded by Chair Yellen’s final post-meeting press conference. Since she will leave the Fed in early February, her words may not carry the weight that they had previously.

Lloyds Bank

The Fed is widely expected to increase interest rates for the third time this year, to 1.5%. It also seems likely to confirm its previously announced path for gradually running down the asset holdings built up as a result of QE. Of more interest will be potential signals for policy in 2018 and beyond. We anticipate the updated ‘dot plot’ will reaffirm policymakers’ expectations of three further rate increases next year. The post-meeting press statement and Fed Chair Janet Yellen’s press conference will also provide some guidance on the 2018 outlook. Overall, we anticipate the Fed to reiterate that they expect economic conditions “will warrant gradual increases” in policy rates.

Westpac

A rate hike at this meeting is the expectation of all in the market, having been well telegraphed by the FOMC since the decision to begin balance sheet normalisation back in September. Justification for the decision can be found in continued above-trend GDP growth, led by the consumer, as well as a labour market that has well and truly achieved full employment. Wages growth continues to lag, but the FOMC remain expectant. Confidence and financial conditions are also very supportive for the economy, hence the downside risks of a rate hike are negligible. Inflation on a PCE basis is expected to firm slowly to target over the coming two to three years. If this occurs and we see two additional hikes in 2018, then the Fed Funds rate will remain neutral to the economy, sustaining growth.

HSBC

We expect the FOMC to raise the federal funds rate by 25bp. Minneapolis Fed President Neel Kashkari is likely to dissent in favor of leaving rates unchanged, as he did in March and June. It is possible that Chicago Fed President Charles Evans could also vote against the rate hike; this would be his first dissent this year. We do not expect any major surprises from the policy statement. The statement will probably repeat that economic activity has been rising at a solid rate, while dropping earlier references to hurricane-related disruptions. The FOMC will likely repeat that near-term risks appear roughly balanced and that inflation developments will be monitored closely. Finally, the statement will likely reiterate the guidance that the Committee anticipates gradual increases in the federal funds rate.

• We expect the FOMC's median projection for GDP growth to be lifted slightly for the next several years. The projection for 2017 could be increased to 2.5%, up from 2.4% in September. The 2018 projection could be raised to 2.3% from 2.1%, and the 2019 projection could be raised to 2.1% from 2.0%. We expect the FOMC's median projection for unemployment at the end of 2018 to be lowered slightly to 4.0% from 4.1%.
• This will be Ms Yellen's final post-meeting press conference as Fed Chair. She is likely to strike a balanced tone with respect to the future course of policy, continuing to endorse the FOMC's message that gradual rate hikes are likely to be warranted in the coming year.

ING

The December 13 FOMC meeting is the last one for Fed Chair Janet Yellen that involves a press conference – the January FOMC meeting will just see a press release - ahead of handing the Fed Chair role to Jay Powell in February. In terms of what to expect, markets widely anticipate a 25bp hike, after which we suspect she will sound a cautiously optimistic tone but offer little in the direction of future guidance to give incoming Chair Powell maximum flexibility. Even after this hike, we are looking at an economy that is growing at 3% and has inflation of 2% yet the Fed funds target rate will be just 1.25% (lower bound). Currently, the Fed funds futures market is only fully pricing in one additional 25bp rate rise in 2018, despite Federal Reserve officials signalling they think three rate hikes is the most likely path for policy.

BBH

The Federal Reserve gets the balling rolling today with the FOMC meeting, which is most likely to deliver the third hike of the year. A rate hike today has long been anticipated.  The lack of a move would catch the market by surprise, and would likely produce a quick steepening of the yield curve and a dollar sell-off.  Barring such a destabilizing surprise, the market may be more interested in the new forecasts than the rate move itself.  We expected little change in the forecasts (dot plot), but could see a small rise in the median GDP forecast.  The September dots showed a median expectation for three hikes next year (two in 2019 and one in 2020).  We do not expect much of a change in this, with officials likely to prefer waiting for the tax bill to be seen.  

BMO CM

FOMC is widely expected to raise policy rates 25 bps, for the third time this year and fifth time since rate hikes started two years ago. The market is pegging the odds (at least) at 92%. And, all eyes will be on the statement, Summary of Economic Projections (SEP) and Chair Yellen’s swan-song press conference for clues to Fed policy in 2018. In the statement, we don’t anticipate much change to the overall economic assessment. The previous verbiage that the “labor market has continued to strengthen and that economic activity has been rising at a solid rate” remains as valid as before. However, the recent stabilization and slight turn up in measured inflation might get mentioned. We expect no mention of the tax cut legislation currently making its way through Congress (although this will likely show up in the subsequent Minutes). Minneapolis President Kashkari might dissent, as he did for the June rate hike.

• In the SEP, we’ll likely get some technical tweaks to the economic projections for 2017, given actual data and the proximity to year-end. Where we could see more meaningful shifts is in the unemployment rate. With the jobless rate currently at 4.1% (it sat at 4.4% last SEP), the 2018, 2019 and 2020 median calls for 4.1%, 4.1% and 4.2%, respectively, could be ratcheted down, as could the 4.6% longer-run level. The median call for the fed funds rate looks locked-in for next year (2.125%) given the frequency of forecasts (6 participants). But there could be a tiny shift to 2019, which is currently sitting in between 2.625% and 2.750%. New Fed Vice-Chair for Supervision Randall Quarles gets to cast his first dot.
• Finally, in the presser, we don’t think Chair Yellen will say anything she hasn’t said before, keeping to the tone of her recent (November 29) appearance before the Joint Economic Committee. No doubt she’ll be asked by the media about a potential Fed reaction to a $1.4 trillion net tax cut. Her answer will be coy. But, with the output gap now closed and the economy essentially at full employment, with household spending and business fixed investment already growing decently (particularly the latter), and with inflation finally showing signs of turning up again, we suspect she’ll be biting her tongue to avoid saying what she really thinks. On balance, we’re not expecting many clues to next year.

Click here to read more about the FOMC preview from our in house Chief Analyst Valeria Bednarik titled “FOMC meeting preview: big noise, little substance?”