RESEARCH ROUNDUP: Fed Chair, More Than Meeting, Is Market Focus
(Bloomberg) -- The FOMC’s two-day meeting that concludes Wednesday is likely to produce only minor changes to statement, and rates market is more focused on President Trump’s pick for Fed chair, based on published research from economists and strategists. Trump is said to plan announcement Thursday; he’s leaning toward current Fed Governor Jerome Powell, according to people familiar with the matter.
- BofA (Michelle Meyer, Mark Cabana, others)
- FOMC statement likely to include small changes to economic outlook in first paragraph
- No changes seen to description of inflation or risk assessment
- Meeting should be a non-event for USD, with Trump’s pick for Fed chair and prospects for tax reform considerably more important drivers; rates market is also more focused on Fed chair race
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- BMO (Aaron Kohli, Ian Lyngen)
- Fed will follow ECB’s lead “and create the least amount of turbulence possible”
- Future composition of Fed board is “still very much up in the air” and “there’s little to be gained from pushing market pricing (already at 80%) for December much higher”
- A decision by Trump to choose Stanford economist John Taylor “could see Treasuries suffer for a few sessions,” while there’s some risk the market will rally right away if the president picks Powell
- Morgan Stanley (Hornbach, Dhingra)
- TIPS breakevens could widen slightly if Fed statement is tweaked to say that survey-based measures of longer-term inflation expectations have slipped
- Investors could be “caught off guard” if there’s any change to Fed’s assessment of such expectations
- MS economists don’t expect such a change; even so, they “see a risk”
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- Bloomberg Intelligence (Carl Riccadonna, Yelena Shulyatyeva)
- FOMC meeting “is unlikely to materially impact market sentiment;” instead, it should reinforce “trajectory to the December meeting”
- Tone of statement will stress that economy has proven resilient despite recent hurricanes
- Minutes of meeting will be focused on assessing worries about inflation expectations
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- Capital Economics (Paul Ashworth)
- Meeting may provide clues on whether most policy makers still support a December hike
- Fed is still on track to raise rates Dec. 13; recent economic data is unlikely to have altered the minds of many central bank officials
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- JPMorgan (Michael Feroli)
- “We would be hesitant to change our near-term Fed outlook” solely based on next U.S. central bank chair; JPMorgan holds this view “even more strongly for balance sheet policy”
- Regardless of who leads central bank, it’s highly unlikely that FOMC will reverse current strategy of gradual, predictable roll-off of securities
- Regional Fed bank presidents who sit on the FOMC, along with some current governors, will remain “important sources of continuity”
- MFR (Joshua Shapiro)
- A December hike “seems to be pretty much a done-deal”
- Even so, three more moves in 2018 as implied by Fed’s dots would be “a heavy lift in the absence of more life to core inflation,” along with wage/salary gains
- RBC (Tom Porcelli, Michael Cloherty, Jacob Oubina)
- Powell would be “the easy choice” for Fed chair and a natural extension of Yellen at time when economy “is not screaming for a wildly different policy approach”
- As Fed chair, he would take a patient approach identical to what’s in place now; that means another hike in December, three more next year, and a terminal funds rate “quite a bit lower” than any other cycle
- Fed’s near-term policy isn’t likely to change much, regardless of who Trump picks to lead the central bank
To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Jerome H Powell "Jay" (Federal Reserve System)
Aaron Kohli (Bank of Montreal)
Guneet Dhingra (Morgan Stanley & Co LLC)
Ian Lyngen (Bank of Montreal)
Jacob Oubina (RBC Capital Markets LLC)
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