FOMC preview: No new signals - Danske Bank

According to analysts from Danske Bank, the Federal Reserve will keep rates unchanged at the next meeting and they don’t see new signals coming. Despite low inflation, they still expect a rate hike n December. 

Key Quotes: 

“We expect the Fed to maintain the Fed funds target range at 1.00-1.25% at the upcoming meeting, in line with consensus and market pricing. As it is one of the small meetings, all eyes will be on the statement, as there will be no updated projections and no press conference.”

“We do not think there will be major changes to the FOMC statement and we think the Fed will reiterate that it is monitoring inflation ‘closely’. We think it is likely to mention the fall in employment in September.”

“A hawkish move would be to mention the surprisingly strong wage growth in September. While this fits with the Fed’s conviction that a tighter labour market will eventually lead to wage and hence price growth, the Fed may not want to overemphasise one month of strong wage growth, which could be partly reflective of compositional effects in employment following the hurricanes (mostly low paid workers being laid off without being paid).”

“Despite low inflation, we still expect the Fed to hike in December (in line with market pricing), as Fed Chair Janet Yellen recently reiterated her faith in the Phillips curve mechanism working its way through to inflation. Therefore, overall, we do not expect any new signals from the Fed at this meeting.”

“In general, the Fed’s willingness to move on with a December hike should continue to support USD crosses near term but we maintain our view that the ECB’s willingness to take tapering to the next level should ensure that EUR/USD bottoms out around the current level.”

“Donald Trump has mentioned the possibility of choosing both Powell and Taylor as Fed Chair and Vice Chair combined. Note, though, that it is very hard to say anything conclusive about who Trump is most likely to appoint, as, in our view, he does not seem very interested in monetary policy and has expressed mutually contradictory views about his desired direction of monetary policy. If Powell is elected, he would be likely to maintain the Fed’s existing tightening strategy by continuing the gradual hiking cycle. As markets have priced in a more hawkish Fed next year, he would be interpreted as a dovish pick, while Taylor would be interpreted more hawkishly. We do not know when this uncertainty will be resolved.”