FOMC Preview: 13 major banks expectation from September meeting

We are closing into the FOMC’s September policy decision and as the clock ticks 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 the focus will be on the commencement of the balance sheet roll off in October while the trajectory of FOMC dot points will also attract some attention. In addition, they expect the Fed to likely leave the interest rates unchanged at 1.25%, while they do not expect any major changes to the statement.

Goldman Sachs

We expect the FOMC to officially announce ... that balance sheet runoff will begin in October. As the Fed has already communicated extensively about its plan for a gradual and predictable runoff, we expect markets to focus instead on the outlook for the federal funds rate. The key question is whether the committee's expectations for the federal funds rate have declined in light of the surprising deceleration in the inflation data since the start of the year. Several Fed officials have expressed reduced confidence in the view that the recent decline is a blip and that inflation will reaccelerate.

Nomura

We expect the primary messages from the 19-20 September FOMC meeting to focus on the commencement of the balance sheet roll off in October. That said we do not expect any additional substantive guidance or details than what has already been provided. Instead, major decisions involving the ultimate size of the balance sheet and its composition will rest with future Fed leadership, in our view. Based on incoming data and the performance of the economy, we expect only several modest changes to the Summary of Economic projections (SEP) compared to June, with the median forecasts for inflation for 2017 and 2018 being marked down in response to the recent weakness in inflation. We also expect the median longer-term federal funds rate to tick down below 3% as members revise down their views of the terminal rate. We expect the statement and press conference to contain only minor changes in language about the path of short-term rates. That is, we do not expect the statement or the press conference to be hawkish or dovish about a possible hike in December. Instead, over the next several months until the December meeting, we expect more vocal debates over the causes of weaker-than-expected-inflation and the role that financial conditions should play in policy decisions.

Lloyds Bank

We expect it to confirm the start of its balance sheet reduction plan, reversing some of the $4.5tn of assets accumulated over the course of its QE programmes. The Fed is also likely to leave interest rates unchanged at 1.25%. Of particular interest will be the press conference with Chair Yellen and an update of the ‘dot plot’ of individual FOMC members’ interest rate forecasts. We expect Ms Yellen to make balanced comments and reiterate that policy is ‘data dependent’. The ‘dot plot’ will be particularly interesting, because we think there is a risk that the majority may signal no further rate rise this year, which would be seen as a dovish signal by the markets. Nevertheless, we believe that the expectation of three hikes in 2018 will remain. Previously in June, twelve out of sixteen officials expected at least one further rate rise this year. Soft inflation readings over the last few months and the potential, albeit short-term, hurricane impact on economic activity point to a pause (but not an end) to the tightening cycle.

Scotibank

No policy rate change is expected until December but announcement of the commencement of reduced reinvestment of Treasury and MBS/agency holdings is expected with implementation soon thereafter. Some reference to transitory influences of hurricanes on growth and inflation plus financial markets is possible. ‘Dot plot’ guidance to expect one further rate hike this year is expected to be retained. A downward revision to longer-run neutral policy rate guidance is expected in light of guidance from some FOMC members with a decline from a 3% long-run policy rate to 25–50bps lower being feasible. Lowered inflation forecasts are a possible accompaniment in light of uncertainty over the drivers of softer-than-expected inflation readings in 2017 while a transitory growth lift from hurricane rebuilding effects into 2018 may be possible.

HSBC

At the upcoming 20 September policy meeting, we expect the FOMC will announce that balance sheet reduction will start in October. We expect that the median projection for 2017 will still be for one more 25bp rate hike in December. The median projection is for an additional three 25bp rate hikes in 2018 and again in 2019. In light of recent low inflation readings, some of the policymakers could lower their funds rate projections modestly for 2017 through 2019. This could create the impression of a “dovish” change in the outlook for longer-run policy tightening. Although some dots could move lower, we do not expect the median projection for 2017 or 2018 will change. There is the possibility that the median projection for 2019 will come down. 

BMO CM

We look for the FOMC to take its first step in balance sheet normalization, announcing the October start of the already outlined program. But, we don’t look for the Fed to take its next step in policy rate normalization. After raising rates in December, March and June, there has been increased policy caution about running both normalization processes in tandem, particularly at the start of reinvestment tapering. We look for the FOMC to shift from a quarterly rate-hike cadence to a semi-annual one, or for the next rate hike this December, then next June. In the Summary of Economic Projections, the heightened policy caution should lead some participants to lower their projections for the fed funds target rate. The dot plot should reveal lower average levels for 2017, 2018 and 2019. However, the median projections for 2017 (1.375%) and 2018 (2.125%) are unlikely to change. We’re not anticipating any meaningful changes to the median projections for real GDP growth, the unemployment rate, or headline and core PCE inflation. It will be interesting to see what participants think about 2020, particularly with the economic expansion likely to become the longest in history as of July 2019. With respect to the press conference, this could be Chair Yellen’s penultimate one. However, the odds of her being re-nominated have risen as Gary Cohn’s have ebbed. We expect Yellen to emphasize that balance sheet normalization should run quietly in the background, that the next rate hike is, as always, data dependent, and that the negative economic impact of the hurricanes along with the negative inflation impact of idiosyncratic factors should both prove to be temporary

Rabobank

We expect the FOMC to conclude its September policy meeting with an announcement that balance sheet normalisation will commence. The Pelosi-Schumer-Trump deal that shifted the deadline for a government shutdown to 8 December –and the deadline for the debt ceiling even further– has made it easier to go ahead with the balance sheet announcement. This deal also removes the need for the FOMC to resort to an implementation lag in order to avoid further market disruptions, and we therefore believe the Fed should be able to start as early as October. Any announcement that balance sheet normalisation will begin shortly should have only a relatively muted impact on markets, given that the market largely expects it. Markets will be interested in the new dot plot that will be released alongside today’s statement: will the median FOMC member still believe a third hike can happen this year, or has the inflation outlook weakened their resolve? Given the roughly 50/50 odds of a December hike currently being priced in, a shift in the dot plot could have a more profound impact on US rates and the currency.

TDS

The Fed is widely expected to announce the start of balance sheet reduction at the September FOMC but there is nearly universal agreement that they will leave rates unchanged. Our base-case is for the policy statement and press conference to convey a cautiously optimistic tone while the accompanying projection materials should reveal a downgrade to the long-run dot while leaving the median 2017 and 2018 dots unchanged. However, we believe the risks lean towards a more dovish outcome.”

ANZ

The FOMC dot points will be in focus. Back in June, the median estimate of FOMC members was for one more 25bp hike this year and a further three in 2018. Will FOMC members maintain that or will they cut the forecast? If they keep the dot points as they are, a rate hike in December will become a central focus (currently 53% priced). A reduction would suggest less confidence in achieving the inflation target over the medium term. All asset markets would benefit on that and the USD would likely weaken.

Danske Bank

No hike but Fed will announce it will begin shrinking its balance sheet in October. This is widely expected and should not have a major impact on Treasury yields. We expect the median ‘dots’ to still signal one more hike this year and three hikes next year. The longer-run median ‘dot’ may be revised down from 3% currently. We do not expect major changes to the statement, as it already says the Fed monitors inflation ‘closely’. We are looking forward to hearing Janet Yellen’s view on the dilemma with low inflation and unemployment at the same time.

ING

This week's FOMC meeting may not be the non-event that many in the market are seemingly viewing it. While the long-awaited announcement of the Fed's balance sheet unwind will be the main event, there will be keen interest in the new official forecasts. These may be used to reinforce the message that, while there is little need for aggressive interest rate hikes, the market remains too complacent on the prospect of higher interest rates.

BBH

After much anticipation, the FOMC decision day is here.  Much of the focus is on the likely decision that the Fed will allow its balance sheet to shrink gradually.  While the focus is on the Fed's balance sheet and its unprecedented initiative, we suspect the market's reaction to today's meeting will not come so much from that which has been so highly anticipated. Rather we suspect that the new economic projections will be more important.  It will be the first time that it extends the forecasts through 2020.  This is important because it will give investors a better sense of where the Fed may see the terminal rate for Fed funds.  The question is will the dot plots point to the Fed funds rate peaking in 2019 and being flat in 2020?  The Fed could slow its projected trajectory so that it shows rates still peaking at the same level but taking longer to reach it.  Alternatively, it could show rates continuing to rise in 2020 so the peak or equilibrium level is higher. Another underlying issue is the significance of the projections when the composition of the Fed's Board of Governors is going to change so profoundly in the coming quarters.  

Westpac

It has been a tumultuous month for the US economy and indeed the FOMC, with Vice Chair Fischer announcing his resignation effective October 2017. This decision will have no impact on the September meeting, the formal starting point for balance sheet normalisation. At the end of this meeting, a specific date will be given at which time the already outlined plan of the FOMC will be put into action. It is intended that this will reduce the balance sheet by around USD2trn over the next five or so years. For the outlook, the more important output of the September meeting will be revised forecasts. The two particular areas of note will be the forecasts for inflation and for the fed funds rate, which recent communications indicate might come under pressure. We retain our December 2017; June and December 2018 rate hike view.    

Click here to read more about the FOMC preview from our in house Chief Analyst Valeria Bednarik titled “FOMC Preview: there's nothing the Fed can do to save the greenback”