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What To Expect From FOMC? – Views From 20 Major Banks

The following are the expectations for today's FOMC July decision as provided by the economists at 20 major banks along with some thoughts on the USD into the event as provided by the FX strategists at these banks.

Goldman: We don't expect additional language intended to prepare for rate hikes in the statement. We expect the statement to drop its prior reference to stable oil prices, but to leave other comments about inflation unchanged. We still see December as most likely lift off date.

Citi: We see hawkish risks on the Fed and with investors consolidating positioning at present, It could spur another leg higher in USD. Awaiting decision markets likely to trade in suspended animation

Morgan Stanley: Investors hope that today’s Fed statement may provide some guidance with respect to future Fed monetary policy, but with inconclusive data, Yellen’s Fed should have no incentive to diverge from her HH remarks made less than a couple of weeks ago. Hence, US front-end yields are unlikely to rally at this point, withdrawing support from USD against most DM currencies, notably EUR and GBP.

Credit Suisse: Credit Suisse’s US economics team believes the Fed will hike by 25bp in September, followed by four further hikes in 2016. To this extent, they have a strong expectation that the Fed will use this week’s Fed meeting to provide a strong hint that a rate hike is around the corner, as was done in previous hiking cycles starting in 1999 and 2004. While the market is still priced for a 25bp this year, it is roughly 50:50 on the likelihood of a September hike. As such, a strong signal would likely be USD-positive outcome, unless it was somehow accompanied by a forceful signal that the terminal rate would be lower and/or reached more slowly than expected. This is why we continue to run long USD positions into the FOMC meeting.

SocGen: We don't expects much from the FOMC statement tomorrow other than affirming data-dependence, so we’ll have to wait for the GDP data Thursday (expect a strong 3.3% growth rate). The overall pattern of the news in the next three days supports the idea of buying the dollar correction before Thursday and selling EUR/USD if it pushes any higher

BNPP: The FOMC meeting is unlikely to provide new support for the USD, with the statement not expected to change materially in terms of forward guidance. Our economists expect the FOMC to upgrade their description of the labour market, but this will be offset by removing language noting stabilization in energy prices. There will be no press conference or new projections released at this meeting and the overall message sent by the statement is likely to be one of continued data dependency, with no catalyst for markets to bring forward Fed rate hike pricing materially.

Barclays: We expect no clear signal from the FOMC today. Yesterday’s slide in consumer sentiment reinforces our view that the FOMC will refrain from sending a strong signal about its policy intentions at the July FOMC meeting. Instead, we think the committee wants to see the Q2 GDP release this week and upcoming inflation and employment reports to judge the strength of momentum heading into September. In Thursday’s advance release of Q2 GDP, we look for 3.0% growth, driven by private consumption and non-energy investment spending

Credit Agricole: The Fed in our view is unlikely to pre-commit to a September rate hike at today’s meeting. Instead, it is more likely to remain data dependent, noting a cautiously upbeat assessment of progress on its dual mandate. Indeed, its statement will likely reflect the strength of the labour market, indicating the absorption of slack and the tentative signs of wage pressure. We think the tone of the statement will reflect Yellen’s recent speeches. Recall, in her semi-annual testimony to Congress the statement and Q&A suggested that the FOMC remains on track to hike rates this year, introducing a bit of a hawkish tint to her language. She noted that prospects for the economy and labour market are favourable while noting the recent pickup in consumer spending – in spite of the weak June retail sales report…Any shift in the FOMC’s statement will likely drive the FX market’s response. The OIS market is pricing in around a 30% chance of a September rate hike while Fed Fund’s futures are pricing in a mere 19% chance. To us, this suggests that, despite the recent rally in the USD TWI (up 4.1% since late June), a cautiously upbeat message from the Fed could help extend the gains. The biggest losers will likely remain commodity currencies and those with large external imbalances. Alternatively, a more dovish-than-expected statement will likely prompt an extension of the recent position squeeze, providing a boost to the commodity complex in particular. Even so, we think any pullback will be short-lived, especially given that markets still have plenty of data to digests before the September meeting

UBS: UBS believes that a rate hike is likely only as late as September, but expects this week's meeting to provide language suggestive of a Fed rate hike in the next meeting. UBS expects the Fed to point to the sustained growth in economic activity and positive momentum in labour data in its statement.

RBS: We don't expect the Fed to move the policy rate at this week’s meeting and see little necessity to change the statement this week…A lack of a clear signal that the Fed’s consensus view is shifting in the dovish direction may be a modest support for the USD.

BofA: We don't expect any explicit changes to the July FOMC policy language to signal something about the timing of liftoff. Rather, markets will have to infer the Fed’s plans from the assessment of the recent data and the outlook in the July postmeeting statement. In accordance with a data-dependent approach, this should be the main way the Fed will communicate the chances for liftoff at upcoming meetings. With the data somewhat more mixed since June, we expect a cautiously optimistic if noncommittal message. This may be slightly more hawkish than current market expectations (which place the probability of a September hike in the vicinity of 40%), but not a strong enough signal to trigger a major repricing in our view.

SEB: SEB has for a long time held the view that the Fed will start hiking rates in September; the probability for postponing that hike has increased lately. Continued strong employment growth and downward trend for unemployment will strengthen the board's belief that the US economy is normalizing and support its assessment that inflation eventually will rise. At the same time there are several factors why the FOMC will think twice initiating rate hikes. Growth indicators continue to be lukewarm, and even if GDP is set to bounce back from the decline in Q1, a strong, above 3% growth, recovery is still distant. Furthermore, the global outlook continues to be shaky, not the least for emerging market. Another reason to await more information before hiking is low and declining inflation expectations. Even though the Fed will downplay the recent oil driven decrease, market expectations have for a long time been on the low side compared to the inflation target. In our view today's press release will repeat the message that although a hike this year is probable the exact timing is contingent on incoming data.

Commerzbank: Attention today is likely to mainly focus on the conclusions the July statement allows on the timing of the first expected rate step. There are only two more possibilities this year: the September or the December meeting. These are the only opportunities for the Fed to explain the rate step during a press conference – a possibility that it is unlikely to relinquish…The Fed has much to lose but nothing to gain if it leaves the market in limbo about its rate plans. If it is planning a rate step in September it is likely to announce that tonight. It is unlikely to become quite as explicit as it did 11 years ago when it initiated the last rate hike cycle. The Fed does not want to commit in advance, as some important data is still due for publication over the coming two weeks which it will want to wait for, in particular GDP data for Q2 tomorrow and the labour market report next week.

Danske: The main event will be the FOMC meeting tonight. There will be no press conference following today’s announcement. Instead, focus will be on the statement released in connection with the announcement. We expect the Fed’s rhetoric to turn more hawkish, which will keep our long-held call for a September hike alive. In particular, we expect the Fed to signal stronger confidence about the outlook for the US economy. The main risk to our call for a September rate hike have been the so-called international developments and it will be interesting to see how the FOMC relates to the recent turmoil on the Chinese equity market.

Deutsche Bank: It is doubtful that financial market participants will glean much new information from today’s FOMC statement. However, we expect to learn a little bit more of what it will take to get the Fed to raise rates (possibly in September), when the meeting minutes are released on August 19. Until then, investors should treat today’s statement as a placeholder… Officially, we still have the Fed hiking in September, but as we highlighted several weeks ago, a lot has to break in our direction for the Fed to raise rates—the inflation outlook has to improve, and we need stability in overseas markets.

LIoyds: The outlook of today’s FOMC policy meeting will be watched closely by markets. No immediate policy move is expected. However, with recent comments from Fed Chair Yellen seemingly increasing the odds of a September hike, investors will be looking for a clearer signal on the timing. There is no press conference, nor will the Committee update its forecasts, and so the only immediate clues will be in the post-meeting press statement. This will likely be more upbeat on recent economic performance. It may also note less concern about the downside risks to inflation, although the recent fall in the oil price argues against this. A bigger question is whether the Fed wants to send a clearer signal that it intends to hike at its next meeting in September. At the start of the previous interest rate tightening cycle in 2004, the statement was changed to read "the Committee believes that policy accommodation can be removed at a pace that is likely to be measured". A similar change in language this time would strongly suggest that the FOMC intends to hike at the next meeting, unless the economic data take a decisive turn for the worse.

HSBC: The committee is expected to keep the target rate for the Fed funds rate unchanged at 0-0.25% and are unlikely to change its forward guidance on the expected path of monetary policy normalisation. The decision to begin raising rates will be data dependant. The economic data since the last meeting has been mixed, with gradual improvement in the labour and housing markets being offset by disappointing retail sales growth and new orders for capital equipment. In her semi-annual testimony to Congress on 15 July, Janet Yellen signalled that a change in the policy rate could happen on any one of the four meetings this year, but that the path of rate rises would be gradual. This was widely perceived as hawkish and the path of rates implied by the Fed futures curve moved up a few basis points. Yellen expressed confidence in the strength of the US economy and that the risks of waiting too long before tightening policy are increasing.

Westpac: Being the last meeting before an anticipated September commencement to the rate normalisation process, expect the FOMC to maintain a data-dependent but positive perspective on the outlook, signalling a readiness to act in the near term.

BTMU: The FOMC may well still be missing that “decisive” information to warrant a shift in policy in order for the FOMC to signal any potential for a move in this evening’s statement. To signal a more to the markets would also be inconsistent with the message from the Fed that the FOMC would decide from meeting to meeting and that decisions were data-dependent. With key wage data on Friday (ECI) and two further non-farm payrolls reports before the meeting in September, a signal in the statement today is very unlikely. The only area for potential change in the statement today will be the opening paragraph covering the description of the economy. There may be some justification in providing a more upbeat assessment of consumer spending and the housing market. In addition, the view in June that energy prices have stabilised will need altering. But by and large the changes will be minor and hence financial market reaction is also likely to be relatively subdued.

NAB: The Fed are not expected to change policy today, but provide some guidance as to the first ‘lift-off’ of rates since 2006. It is possible that they change the risks to balanced, acknowledging the better employment market, but some inflation disappointment. It’s been a long time between cycles. That prolonged period of policy easing has made markets nervous about the coming cycle and how various asset classes, including or especially those outside of the US, will cope… So a September versus December kick-off will generate short-term moves in the USD and yields, but it is the path ahead that should be the most important factor. In that, the Fed is likely to reassure on a steady, and very slow, hiking cycle in the statement.

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