FOMC Preview: 13 major banks expectation from June meeting

We are closing into the FOMC’s June policy meet decision and as the clocks tick closer to the decision timing, following are the expectations as forecasted by the economists and researchers of 13 major banks along with some thoughts on the future course of Fed’s action.

Most economists and analysts suggest that another 25bps dovish hike is in the pipeline for this meeting but uncertainty is growing for the future course of monetary policy in the second part of the year. In addition, Chair Yellen’s post statement remarks may be helpful in determining what the Fed’s next move will be.

Natixis

Another 25bps hike is in the pipe for this meeting but uncertainty is growing for the future course of monetary policy in the second part of the year. With the Fed’s goals going in opposite directions (lower inflation and lower unemployment rate), J. Yellen’s message will be key in determining whether or not the central bank will be eager to pursue with its initial plan for the year (i.e. another hike in September and balance sheet normalization announcement in December). We expect the dots to remain broadly unchanged. That being said, there may be a chance for the median of the dots to move higher in 2018 just as the result of Tarullo’s departure. The dots plot will remain consistent with 1 more hike in 2017 (after the June move) and 3 in 2018. Chair Yellen’s post statement remarks may be helpful in determining what the next move will be (hike or BS normalization). Our central scenario remains that the Fed will hike one more time in September before announcing a BS normalization plan in December. It is worth noting that if the Fed wants to start normalizing its BS in September it probably has to update its Policy Normalization Principles and Plans as soon as on Wednesday.  

Rabobank

The FOMC’s 2 day meeting is widely expected to bring a 25 bp hike in the Federal funds rate on Wednesday.  Arguably of more interest, however, will be the Committee’s assessment of the recent run of mixed data and whether this is sufficient for the Fed to be less confident about the prospect of a third rate hike later in the year.  It is our view that a rate hike this week will be followed by steady policy through the remainder of the year.  We see scope for the FOMC to make a downward revision to its PCE inflation projections which in March suggested 1.9% for both the headline and core measure in the final quarter of this year. Weaker inflation could also influence any decision by the FOMC regarding a reduction in the Fed’s USD4.5 trn balance sheet.  Some FOMC have been suggesting that the Fed could start to reduce the size of the balance sheet by year end.  This assessment, however, assumed a third rate hike in 2017.

ANZ

The FOMC is set to lift the target range for the fed funds rate by 25bps today and appears to be settling on plans for a very gentle unwind of its balance sheet, according to the analysts at ANZ. Further details may be forthcoming in the Statement or from Chair Yellen’s press conference. The Fed’s tightening trajectory (dot plot) is unlikely to shift at this meeting despite a likely lowering of its short-term unemployment rate forecasts. The implementation of balance-sheet normalisation will lead to a modest tightening in financial conditions. If there is to be a shift in pace from the Fed, it’s possible it could be toward more gradualism if the recent subdued trend in inflation extends.  

HSBC

The FOMC minutes from May show that a rate hike at the next meeting (13-14 June) is likely. With a June hike now strongly assumed by market players, there seems little chance of strong Fedinduced upward USD movements in the short term. We also expect that a change in the Fed’s reinvestment policy to reduce its balance sheet will likely not happen at the June meeting, though more details of the disinvestment policy may be communicated to financial markets. It could still start sometime this year and not next, as we previously thought, but the 19-20 September FOMC meeting is more likely, implying commencement of disinvestment in October.

Nomura

At this point it would be very surprising if the FOMC does not raise its target rate for the funds rate to 1-1.25%. The preponderance of Fed speakers in recent weeks has made no attempt to dissuade markets that a hike is coming in June. The bigger issue at stake is what the FOMC signals about what comes afterwards. Instead of revising their forecasts materially at the June meeting, we expect more substantive changes in the September meeting after more data become available and a more thorough reassessment can take place. In effect, we expect the FOMC to wait to see how these trends evolve before signaling a change in its economic outlook. On balance sheet policy, we expect the FOMC to continue to discuss its plans for allowing the portfolio to roll off. But we are not expecting a major announcement at this meeting.

Deutsche Bank

The Fed should raise rates another 25bp and signal that an announcement about beginning to phase out balance sheet reinvestment is likely in the coming meetings if the economy remains on track. Beyond this signal, we do not anticipate that the Fed will provide specific details about various aspects of the balance sheet unwind (e.g., the initial size of the caps). But with the rate hike and the shift in balance sheet policy seemingly well anticipated by the market, the key question for the meeting will be whether the Fed provides any additional guidance about when the next rate hike is expected to occur and, relatedly, whether they will pause when announcing the change in their balance sheet policy. The median dot for 2017 is likely to remain at three rate increases, indicating that another hike after June is still expected this year, but we anticipate that the Committee will leave itself plenty of flexibility with the timing, neither indicating that a hike will come in September nor that they have decided to pause when they announce a change in their balance sheet policy.

TDS

The FOMC is widely expected to hike 25bp at its June meeting. The statement and Yellen’s press conference should look past the recent data softness and reaffirm three hikes and reduced reinvestments for this year. Markets appear to expect a “dovish hike,” so unchanged median dots and talk of balance sheet runoff each risk a hawkish disappointment for markets.

SocGen

The FOMC’s response is likely to be a ‘dovish hike’ and that’s priced in, to a large degree. Uncertain about how much slack there is in the economy or the labour market, FOMC members are inclined to want to ‘normalise’ rates while they have the chance, but they seem very pragmatic about the longer-term outlook. So more likely to raise rates now, without overlay hawkish commentary, and then lay the groundwork for another hike in the autumn if markets don’t take fright in the weeks ahead.

Danske Bank

We stick to our view that the Fed will skip hiking at the upcoming meeting and instead announce the triggers for quantitative tightening (QT), as a datadependent Fed should wait at least one meeting to confirm that recent weakness is only temporary. However, given the high expectations of a June hike, the Fed may have painted itself into a corner, as high expectations have weighed on the Fed’s decision before. If the Fed hikes in June, we do not expect an announcement on QT. Instead, we expect it to be postponed until the September meeting. We still think the third hike is most likely in December. We expect unchanged ‘dots’ signalling three hikes per year and see limited chance of a hawkish surprise.

RBC CM

A 25bps hike to 1.00–1.25% is almost fully discounted this week. More important will be Chair Yellen’s press conference for a bit more detail on balance sheet run-off. It is probably too early to get the initial sizes of the caps, but we may get more on the likely evolution of these. We simply view the caps as a flexible tapering. Tapering would have been very hard to adjust once it was announced, while caps can be far more data-dependent.

BBH

The US dollar is narrowly mixed ahead of the FOMC meeting, where a dovish hike seems widely expected. The market has practically fully discounted a 25 bp hike in the Fed funds target range today.  Investors are more interested in the forward guidance rather the rate move itself.  Yellen will likely stress the data dependency of the FOMC.  It seems that the potential need for a tactical adjustment is possible precisely because Fed policy is not dictated by some rule-based system.  Bloomberg and the CME calculations show a little less than a 40% chance of another hike this year. Investors are also looking for more details about the Fed's balance sheet strategy.  Such information is more likely to be found during Yellen's press conference rather than the FOMC statement.  

Goldman Sachs

Data dilemma shouldn’t derail Fed outlook. Another hike is extremely likely from the Fed on Wednesday. However, recent data have sharpened the dilemma that inflation and employment are sending increasingly different signals about the urgency of further tightening. We don’t think the recent data call for a major change in the Fed’s policy outlook, as they have have broadly offsetting implications for the policy outlook in standard Taylor rules. The press conference should provide some clarity on whether the next tightening step after June will be balance sheet normalization – our expectation – or a third funds rate hike

Westpac

The research team at Westpac, expects the US Fed to raise interest rates by 25bps to 1.125% today. 2017 has seen an acceleration in the pace of interest rate normalisation in the US. Following two years where the Committee struggled to achieve one rate hike, they are targeting three in 2016, with the second universally expected at this meeting. A strong labour market and robust confidence are the prime supports for policy normalisation. The focus for the press conference will be to see if any further guidance on the timing and pace of balance sheet normalisation is offered. A decision before end-2017 is anticipated.

Click here to read more about the FOMC preview from our in house Chief Analyst Valeria Bednarik titled “FOMC meeting: dovish hike or hawkish surprise?”