RESEARCH ROUNDUP: Fed Seen Tearing Up Script on Rates
(Bloomberg) -- FOMC statement and latest economic projections that suggest a slower pace of tightening signal that central bankers could be bracing for economic reversal, analysts say; 5Y-30Y yields hit YTD low closes.
- USD fell to fresh low, declining -0.5% as measured by BBDXY after FOMC statement published
- Bank of Tokyo-Mitsubishi (Chris Rupkey)
- Fed officials “more worried than their words can say”; slowdown in pace of interest-rate normalization “has profound implications for fixed income assets”
- Fed “telling us that the economy is not strong enough for rates to be raised at even a gradual pace”
- “Markets are right to ask what does the Fed see that you don’t see. They see a world of increasing risk, make no mistake about it”
- Point72 Asset Management (Dean Maki)
- FOMC released “dramatically” lower fed funds rate projection, suggesting the Fed will be much slower to raise rates in the future, even if conditions are as expected
- Fed setting a high bar for rate increases
- Sees next hike in Sept.
- Jefferies (Ward McCarthy)
- FOMC statement, SEP and Yellen press conference “provided a very confusing and conflicting message that raised more questions than were answered”
- Unclear why FOMC abruptly backed away from expectations of raising rates in “coming months” and made dramatic changes in fed funds rate projections
- “This has not been a good day for Fed credibility”
- Macquarie (Thierry Wizman)
- Yellen didn’t rule out July by saying it’s “not impossible,” but that doesn’t make it sound like a hike is on the way; FOMC clearly more cautious
- Yellen comments during press conference are “very mild, tempered"; certainly avoiding calendar-based guidance in favor of data-based
- Goldman Sachs (economists led by Jan Hatzius)
- FOMC hinted that latest pause may continue a while longer; statement, SEP indicated ‘‘cautious approach”
- Fed more dovish than expected, given number of policy makers now expecting 1 hike this year, fed funds rate projections for 2017 and 2018 and “slightly more concern” about developments in inflation expectations
- Bloomberg Intelligence (Carl Riccadonna, Yelena Shulyatyeva and Richard Yamarone)
- “Fed officials appear to be conceding defeat on their communications campaign following the April FOMC meeting, which had resulted in a strong repricing of the probability of a mid-year rate increase”
- “Their progress was sharply unwound following the disappointing May jobs report”
- See BI commentary
- Pantheon Macroeconomics (Ian Shepherdson)
- “Fed’s unemployment forecasting record has been abysmal in recent years, but their errors have been costless because inflation has been well-behaved”
- Fed “laughably” expects no further decline in unemployment rate this year; as wages accelerate, underestimating downward pressure on joblessness could become more consequential
- Barclays (Michael Gapen and Rob Martin)
- Believe Yellen belongs to group of 6 FOMC members who expect just one rate hike in 2016
- Barclays maintains outlook for single increase this yr, in Sept.
- UBS (Maury Harris, Drew Matus, Samuel Coffin, Dave Liang)
- Downward migration of 2016 dots, skewed toward fewer rather than more than 2 hikes, suggests FOMC plans to wait for “conclusive proof” of life in labor mkt and risk of global developments to fade
- This points to hike “no earlier” than Sept.; by then, Fed will have multiple data on inflation, employment, unemployment, growth
- MFR (Joshua Shapiro)
- “There is very little chance that the FF target is going to come anywhere near the levels implied by the median ‘dot’ for year-end 2017”
- Capital Economics (Paul Ashworth)
- Fed could still raise rates in July; would require “meaningful rebound” in June payrolls, “decisive” vote for U.K. to remain in EU
- Most likely scenario is 25bps rate increase at Sept. meeting
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Chris Rupkey (Bank of Tokyo-Mitsubishi UFJ Ltd/The)
David Liang (UBS Securities LLC)
Dean Maki (Point72 Asset Management LP)
Drew Matus (UBS Asset Management Japan Ltd)
Ian Shepherdson (Pantheon MacRoeconomics Inc)
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