We are closing into the FOMC’s March 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 17 major banks along with some thoughts on the future course of Fed’s action.
Most economists and analysts expect the US interest rates are almost certain to be raised this evening, by 0.25% to 1% at the top end of the Fed’s interest rate band at the conclusion of the today’s meeting as the incoming data since the last meeting has been sufficiently positive for the Committee to conclude that the case for rate hike has been met. In addition, most of the banks expect that the risks to the Fed outlook are slightly more skewed toward more hawkish side.
We expect a 25bp rate hike. Focus will be on the rationale for a hike and the outlook for the rest of the year. We expect that the median projection for the funds rate will stay at 1.4% for yearend 2017, and 2.1% for yearend 2018. If the median projections do not change, then attention will be focused on Chair Yellen’s press conference and anything she might say about factors that will guide the timing of additional rate hikes this year. Yellen may also take this opportunity to discuss the outlook for the Fed’s balance sheet policy.
US interest rates are almost certain to be raised this evening, by 0.25% to 1% at the top end of the Fed’s interest rate band, following hawkish rhetoric from policymakers and strong economic data. The median of individual Fed members’ policy rate projections in the updated ‘dot plot’ is likely to reaffirm a total of three hikes this year, in line with our expectations, but there may be a greater skew towards four or more hikes than before.
Relative to the market’s dovish perception of the FOMC, a more positive assessment on the balance of risks around the economic outlook and reafﬁrming comments from Chair Yellen for a base case of three hikes in 2017 should lead the market to reprice the distribution of risks around the median dot in a more symmetric way. An increase of the median dot for the federal funds rate at the end of 2018 by 25bp (i.e., a move from three to four hikes in 2018) would certainly move market pricing even more in a hawkish direction. Based on our view that the balance of risks around the FOMC meeting is tilted to the hawkish side, we think that the Dollar has more room to appreciate versus all other G10 currencies even from a tactical perspective.
After last Friday’s Employment Report, it is likely to have convinced the FOMC to go ahead with the rate hike that they carefully signalled to the markets earlier this month. The FOMC meeting concludes with a press conference by Chair Yellen. The Fed will also publish the updated projections. The rate projections will be of particular interest. Back in December 2016, they implied three hikes in 2017. However, with a rate hike in March, we could very well be on course for four rate hikes this year. Therefore, markets will be looking at the ‘dot plot’ for clues about the Fed’s intentions beyond March.
This evening’s FOMC announcement (6pm GMT, with a press conference half an hour later) is all about the Fed’s projections rather than whether they raise rates or not. Anything other than a 25bp rate hike would be a huge surprise to the market. Discounting that possibility on the grounds that the Fed is so (too) obsessed with managing market expectations ahead of policy moves, what we’ll watch are the ‘dots’ showing FOMC’s projections of where Fed Funds might go. Market pricing of Fed Funds through 2017- 19 is at the bottom of what the Fed currently projects. Our US economists think that the 2017/18 dots probably won’t move but beyond that, an upward adjustment is possible to send a signal to the market that the FOMC is serious about normalising policy.
While the most recent jobs data were robust, we do not expect any changes to the Summary of Economic Projections (SEP). Most importantly, we do not expect any changes to the median estimates of the fed funds rate in the dot plot. The Committee will be adding new "fan charts" to the SEP that provide a visual representation of the forecast errors around its projections but they do not convey much new information. Finally, the tone of the meeting statement and Fed Chair Yellen's press conference are both likely to convey increased conﬁdence in the economic outlook. Yellen's February 14 semi-annual monetary policy testimony and her most recent speech from March 3 are excellent guide posts in this regard.
It’s fairly clear that the Federal Reserve will raise its fed funds target range by a quarter point to 0.75–1% when its policy statement lands at 2pmET today. The risk to the Fed’s forecasts is toward a slightly more hawkish than priced outcome. Committee forecasts are likely to receive more attention than either the statement itself or Chair Yellen’s press conference at 2:30pmET. Forward rate guidance is likely to continue to emphasize “gradual” hikes. Forecasts may include small upward revisions to 2017–19 GDP growth after a slightly weaker than expected 2016 and given the Fed is lower than Bloomberg’s consensus in each year. Of greater importance will be the so-called dot plot for FOMC participants’ assessments of forecast hikes. My base case assumption is that the FOMC’s median projections remain in favour of three hikes per year in each of 2017, 2018 and 2019. The risks to the Fed outlook are therefore slightly more skewed toward more hawkish long-run forecasts and rate guidance than the last set of dots.
We look for the FOMC to raise the target range for the fed funds rate on March 15th by 25 bps to 0.75%-to-1.00% (an 88-bp midpoint), with the other policy rates following suit (interest rate paid on reserves to 1.00%, overnight reverse repo rate to 0.75% and discount rate to 1.50%). Note that we will now be just one more move away from every policy rate sporting a “1 handle”. Apart from the rate hike itself, we suspect the other major change will involve the risk assessment, with the previous “roughly balanced” phrase becoming more neutral (say, just “balanced”). We anticipate no change in guidance concerning reinvestment policy, despite recent market buzz and some limited official chatter. Chair Yellen will likely emphasize two key themes: (1) Yes, the economy is doing better and this is making the Fed more confident. And (2), no, the latest rate hike is not the start of a quarterly pattern. Mostly everything else said will probably be rehash.
We expect the FOMC will decide to raise the Federal Funds Rate by 0.25% to 0.875% (mid-point of range). Following the speech of the Chair of the Federal Reserve, Dr Yellen, it appears clear to us that she feels the US labour market is at full employment and that inflation is near their medium-term 2.0%yr target. We do not expect the forecasted path of monetary policy through 2017–2019 to change materially from the December round. At that time, the FOMC's median expectaton was for 3x0.25% hikes in 2017; 3x0.25% hikes in 2018; and 3x0.25% hikes in 2019, moving the Fed Funds Rate to 2.90% by end 2019 – very close to their long run expectation of 3.00%. Of course, their 2017 view will be adjusted to 2x0.25% hikes following the anticipated move in March.
The Fed gets top billing here where we expect they will raise the Fed funds range to 0.75/1.00%. Fed officials have been driving this home for weeks now and our sense is it would take a significant negative event to stop them from lifting rates at this point. We do not expect current year Dots will move much (we look for the Fed to maintain their current view of 3 hikes). We believe directionally the median for 2018 is poised to see an additional hike but they may prefer to wait for further clarity on the fiscal front. But from our lens it seems obvious it is going higher in the coming months. Overall we expect Yellen will strike a constructive tone at the press conference consistent with her other recent musings (and, in keeping with the tone of the data in the US).
In the United States, after the Fed launched a major communication campaign over the last few weeks, we are expecting another rate hike of 25bps on March 15. The target range of the Fed Funds rate will therefore reach 0.75-1.0%. There will also be an update of the dots and the summary of economic projections. A slight upgrade in economic forecasts is likely for the next few years while the dots might show more appetite for rate hikes in 2017 and 2018. More members will expect three rate hikes this year but the median should remain unchanged at 1.375% (i.e. consistent with 3 hikes overall). The meeting will also be followed by a press conference.
Data have generally met the Fed’s expectations, risks to growth have shifted to the upside and stock markets continue to be close to highs, easing financial conditions. We continue to expect three hikes this year (including March), plus an announcement of plans to reduce the balance sheet in December. We do not feel the new fan charts will reveal much about future policy, and the “dots” will likely show three hikes in total this year.
Following explicit signals, including from Chair Yellen in her most recent speech, Thomas Costerg, Senior Economist at Standard Chartered, expects the Federal Reserve (Fed) to hike the policy rate another 25bps on 15 March. We expect the dot plot to still show three hikes this year (and still three next year), not four, despite the ongoing sense of optimism. There could be a discussion about the end of the reinvestment of the QE portfolio. We expect this decision to remain high-level, with the debate a work in progress. We expect the interest rate on excess reserves to be 2.0% by end-2018. We still see the Fed struggling to raise rates above 2.0% given the high debt level in the economy, and the late stage of the business cycle, even if President Trump’s Fed appointments give a more hawkish direction to the Federal Open Market Committee.
We expect the FOMC to increase the federal funds target to 0.75-1.00% at the conclusion of their next meeting. Since the January meeting, financial conditions have improved and the risk that the economy is gaining momentum has increased. Therefore, we expect that the distribution of the FOMC participants’ policy rate projections (the “dots”) will likely become less dispersed largely because the lower tail of distribution shifts to the median. However, we expect the median of the participants’ policy rate projections for 2017 and 2018 to remain unchanged, implying three hikes for 2017 and 2018, respectively. We do not expect changes to the FOMC’s long-term forecast for the policy rate. Elsewhere in the SEP, we expect only small changes to their GDP or unemployment rate projections. The median of their forecasts for core PCE inflation for 2017 could be revised up slightly to 1.9% from 1.8% previously, reflecting the recent firming of core goods prices.
The combination of data and official comments spurred a sharp swing in expectations toward a rate hike on March 15 and there is no reason to think that the Fed will not deliver. This is taken as given now, and investors will be more interested in the updated forecasts (dot plot) and the context Yellen provides at her press conference.
We expect the Fed to hike its target range by 25bp to 0.75-1.00% in line with market pricing and consensus among analysts. Given the very high probability of a March hike, the question is now how many hikes to expect for the rest of the year. FOMC members have repeated that they believe three hikes this year is appropriate and thus we expect the Fed to maintain the ‘dot’ signal for this year unchanged at three hikes in its updated projections.
Expectations of a 25bp hike in the fed funds rate is nearly universal and fully priced in ahead of FOMC rate decision at 14:00 ET. TD expects the statement to convey a mildly hawkish message. The SEP & press conference should be more telling—we expect the dots to drift higher but do not see any change in the 2017 or long run median dots and see only modest tweaks to the economic forecasts. In the press conference, Yellen should continue to emphasize a gradual pace of rate hikes (3-4 hikes per year). We also look for any commentary regarding to fiscal stimulus assumptions.
Click here to read more about the FOMC preview from our in house Chief Analyst Valeria Bednarik titled “FOMC meeting: it's not about the rate hike, it's about hints”
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