FOMC's dot plot preview - TDS

As always, the market will be most focused on the dot plot. Importantly, economic forecasts barely change between end-2018 and end-2020 in the June SEP, yet the median number of hikes is four during this two-year period. 

Key Quotes:

• "That reflects the widespread belief on the Committee that policy needs to return to neutral, and even potentially move somewhat higher as growth remains above potential, unemployment below NAIRU, and inflation above target in 2020. We continue to expect most of the 2019 and 2020 dots to suggest a tendency toward modestly outright restrictive policy relative to the longer-run dots."
• "The net addition of one new participant in September (add Clarida and SF Fed stand-in, lose Dudley) means the longer-run dot will move: right now the median dot is between 2.75 and 3%, as only 14 were submitted in June. (Bullard has refrained from submitting a longer-run dot for a while.) As noted above, we see a slightly better-than-even chance that the median will settle at 2.75% in September, although it is a very close call. Over time, we expect the median longer-run dot to settle at 3%. The outcomes here are fairly bimodal: dipping back down to 2.75% will be seen as modestly dovish for a market that has struggled to price the Fed hiking to its median longer-run dot; rising back to 3% would likely be seen as somewhat hawkish." 
• "Our reading of the collection of speeches heading into the September meeting suggests to us that one or two 2018 dots could shift up from three hikes for this year to four. That reinforcement of the June median should primarily serve to reinforce the recent move higher in market pricing for the December meeting." 
• "For 2019 it would only take one dot at the median to move lower to shift the median down to two hikes for 2019 from three currently. (At least four dots at the June median would have to rise to shift the median to four hikes for 2019.) We don’t see a strong case for the median dot in 2019 to change, but there is some chance it could drift lower — and markets would take a dovish view of that shift."
• "For 2020, we do not see a compelling case for any change to the median dot: it would take two moving up to get a higher median, and three moving down to get a lower median. Note that the 2020 dots will continue to show a sizable majority of Fed officials expect it will be appropriate to hike somewhat above neutral during this hiking cycle."
• "As discussed above, the outlook for the 2021 dots is less certain, and may not be all that market relevant given how far they are into the future. That said, our base case is for a similar median as the 2020 dots (perhaps with a tighter range or central tendency). If some number of Fed officials think it will be necessary to tighten further to cool an overheating economy, the 2021 median dot would be higher than the 2020 one; if some number think that earlier hikes already achieved that objective and policy itself needs to revert to neutral, the 2021 median dot would be lower than the 2020 one. We think the former is slightly more likely than the latter given the size of the gap between the unemployment rate and NAIRU in 2020 and the expectation that it will not close quickly in 2021."