FOMC Preview: 9 major banks expectation from May meeting

We are closing into the FOMC’s May 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 9 major banks along with some thoughts on the future course of Fed’s action.

Most economists and analysts expect the FOMC to leave US policy rates unchanged and to make little change to the press statement at the conclusion of the today’s meeting. There are no scheduled post-meeting press conference or forecast updates at this meeting, but there is some possibility that the committee will attempt to provide more clarity regarding specifics of the long-term trajectory of the adjustment process.

Natixis

We expect the Fed to remain on hold at its May 2-3 FOMC meeting with few changes to the wording and no signal for the short term conduct of monetary policy. There will be no press conference and no update of the summary of economic projections. The target range of the fed funds rate will remain unchanged at ¾-1%. Only the statement will be released. It should undergo minor changes without any signal for the conduct of monetary policy in the short run. Therefore, the Fed shouldn’t’ close the door for a move in June without signaling its intention to hike neither. In line with our view, the market is not anticipating a move at this month’s meeting and expects the next hike in June. Compared to the March meeting, the wording should be revised slightly in order to reflect recent developments in the US economy.  The central bank should acknowledge that growth slowed down in Q1 but is likely to attribute the deceleration to temporary factors. The first paragraph should continue to point to a strengthening of the labor market as even though the pace of job gains deteriorated, the unemployment rate decreased below the Fed’s estimate of the long-term level. As for inflation, since the core PCE deflator decreased from 1.8% to 1.6% in March, slightly below the level that prevailed when the Fed met in March, the statement should continue to say that core inflation has “continued to run somewhat below 2%”. The Fed will continue to describe near term risks as “roughly balanced”. We will also watch out for any changes of the wording on the reinvestment policy. It might be too early for the Fed to edit the statement, but given the abundant discussions on the topic, we cannot entirely rule out this possibility.

Nomura

We expect no change in short-term interest rate policy at the 2-3 May FOMC meeting. Recent Fedspeak indicates most members expect two more rate hikes later in 2017. While short-term interest rate policy will most likely remain unchanged at the upcoming meeting, markets will pay significant attention to the language of the FOMC statement at the end of the two-day meeting. We find it most likely that there will be no significant change in language as it relates to the balance sheet – not much has changed since the most recent FOMC meeting. However, there is some possibility that the committee will attempt to provide more clarity regarding specifics of the long-term trajectory of the adjustment process. Additionally, the language of the first two paragraphs of the post-meeting statement, as they relate to recent economic developments and expectations, will be under scrutiny as they may give additional clues on the committee’s intentions for the next rate hike. Given the data-dependency of monetary policy, it is important for the FOMC to describe the economic status in a way that it can manage market expectations.

Lloyds Bank

This evening’s FOMC meeting is expected to be largely a non-event. We expect the Fed to leave US policy rates unchanged with the upper bound at 1% and to make little change to the press statement. There is no scheduled post-meeting press conference or forecast updates at this meeting. Hence, we do not expect a clear signal just yet of an intention to hike interest rates in June (which is our central view).

SocGen

The FOMC meeting isn’t expected to result in a policy change, but they will want to keep June ‘live’ and despite softer data, a slightly hawkish bias is likely. Our rates strategists favour a bearish bias once the current event risk is out of the way, because the market only prices three hikes between now and the end of next year. The question is how hawkish the Fed will be. If they are true to form, they will be nudging expectations rather than acting forcefully and that will be more risk-friendly than dollar-friendly.

TDS

All eyes will be on Washington DC for the May FOMC meeting and rate decision and TDS base case is for the Fed to leave rates unchanged while acknowledging the slowdown in Q1 growth. We expect the Fed to remain upbeat on the labour market, though if they decide to dismiss Q1 growth as transitory we would view that as hawkish. At the May FOMC meeting, we expect Fed officials to hold rates steady and to not give any explicit signals about the future path for policy. That may be dovish relative to high market expectations for a June hike. The statement should acknowledge the softer recent data, but largely look past it as the Committee’s outlook remains positive.”

Danske Bank

The FOMC meeting is one of the small meetings (no updated projections and no press conference) and we do not expect any changes in monetary policy or any major changes in the statement. Although market expectations of this meeting are downbeat. There are currently two hikes priced in over the next 12 months with focus recently shifting to the timing of the balance sheet reduction. Macro data has been weakening with the question now being whether or not the Fed will proceed with the signalled hikes or once again take a more cautious stance

BBH

The statement from this week's meeting is likely to be devoid of new information.  It may tweak its economic assessment as the recent data warrants, including the continued improvement of the labor market, and better capital investment. Inflation, it will likely note, is near target.  In the quarterly calculation of GDP, the core PCE deflator accelerated to 2.0%, though the monthly estimate is a little lower.  The continued gradual removal of accommodation will be justified, though there is no reason to expect an explicit signal that it intends to hike rates at the June meeting.  With the cycle underway, there is no need for that level of forward guidance.   It is also unreasonable to expect fresh revelations about the balance sheet strategy.  Discussions are ongoing, and there is no need for any decision yet.

Westpac

At its March meeting, the FOMC went ahead with a welltelegraphed rate hike, the third in this cycle.The May meeting will not see a follow-up hike. To our mind, that will need to wait until June. However, market participants will be on the lookout for any further guidance in the timing of changes to their other policy lever, the size of the balance sheet. Currently, expectations are centred on a December announcement and January 2018 commencement of balance sheet normalisation.

Rabobank

Since the Fed is attributing the disappointing economic data to noise, they are likely to continue to aim for a hike in June. In fact, the Fed remains optimistic. They continue to emphasize the upward risk to the outlook from fiscal policy. For 2017 as a whole, we expect two (with the second in December) instead of three hikes. Of course, with substantial upside risk to our baseline if it’s only noise.”

Click here to read more about the FOMC preview from our in house Chief Analyst Valeria Bednarik titled “FOMC meeting: no game changer for the USD"