RESEARCH ROUNDUP: Fed May Struggle to Assess Economy on Weak 1Q
(Bloomberg) -- FOMC heads into May 2-3 meeting in Washington after data showed weakest GDP in three years; Nomura economists, led by Lewis Alexander, say policy makers face challenge in assessing U.S. economy.
- Even if the Fed doesn’t take action at this meeting, it will probably stick with three rate increases this year and the prospect of eventually changing its balance sheet policy, based on published research from economists and strategists
- Current implied probabilities of a rate increase at the May meeting are ~15% vs more than 60% for June
- See also: U.S. Economy Grew 0.7% in First Quarter, Slowest in Three Years
- Barclays (Michael Gapen, Rob Martin, Blerina Uruci)
- Fed statement is likely to mention slowing 1Q activity, while signaling that normalization plans remain in place
- Any changes to reinvestment policy won’t come until after FOMC agrees on how to scale back redemptions
- Bar for delaying rate hike has risen; Barclays expects increases in June, September
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- BofAML (Michelle Meyer, Joseph Song, Mark Cabana)
- Fed probably wants to bring rates to at least 1.25%-1.5% before shrinking balance sheet; it could announce change in reinvestment plan in December
- Fed to hike in September and December, and add three more rate increases in 2018
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- Capital Economics (Michael Pearce)
- Fed statement to keep prospect open for a June hike
- Balance sheet will be another “live issue” at May meeting
- Wouldn’t be surprised to see some discussion of balance sheet in minutes of meeting
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- Goldman Sachs (Jan Hatzius, others)
- Odds of a June hike raised to 70% from 60%
- Upward revision is tied to continued firming pace of wage acceleration and strong growth in coming quarters
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- Morgan Stanley (Ellen Zentner, Matthew Hornbach, others)
- Fed to “inch closer” to a June hike during May meeting
- With market already pricing in more than a 60% chance of a June hike, Fed can avoid sending signals
- Policy makers are likely to keep fed funds rate at 0.75%-1% on May 3, with very little change needed to statement
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- Nomura (Lewis Alexander, others)
- No change seen in rates or balance sheet policy at May 2-3 meeting
- Even so, policy makers may try to provide more clarity on long-term trajectory of adjustment process
- Fed faces challenge in how to assess U.S. economy, given 1Q weakness and downside surprise in March employment/core CPI
- MORE
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Blerina Uruci (Barclays PLC)
Ellen Zentner (Morgan Stanley)
Jan Hatzius (Goldman Sachs Group Inc/The)
Joseph Song (Bank of America Corp)
Lewis Alexander (Nomura Holdings Inc)
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