RESEARCH ROUNDUP: Greater Chance That FOMC Dots Will Move Higher
(Bloomberg) -- (Adds Bank of Tokyo-Mitsubishi, Bloomberg Intelligence, SocGen to item that was originally published on March 13.)
- Market participants say there’s now a greater chance that the FOMC will raise median forecasts for fed funds rate at two-day meeting that ends Wednesday, based on recent published research and interviews; there’s a risk that the number of expected moves for this year or in 2018 rises to four from three.
- Dots will likely overshadow a rate hike, which is seen as a given by most commentators and would be just the third move since December 2015; see also: U.S. jobs report supports Fed rate increases and USTs face Fed, debt ceiling, credit issuance
- Bloomberg Intelligence (Michael McDonough, note)
- Fed officials may price in more aggressive tightening over next several years given signs of inflationary pressure, U.S. economy’s proximity to full employment and less dovish tilt of policy makers’ comments
- MORE
- BofAML (Michelle Meyer, note)
- Fed’s doves seem more comfortable with hiking cycle, while hawks are probably more enthusiastic about higher rates
- Though a close call, it’s “more likely than not” that median dot still implies three hikes this year
- Risk is that 2018 median dot moves higher, implying four hikes
- BoT-Mit (Chris Rupkey, notes)
- “We expect a steeper path of rate hikes”
- Three hikes per year won’t get rates to normal levels quick enough to put demand and supply in better balance and keep inflation from overshooting
- EARLIER: Fed’s updated 2017 forecasts should show at least three more hikes this year (after March) with moves in June, September and December
- Citi (Dana Peterson, Andrew Labelle, note)
- Greater attention is likely to be paid to Fed’s forecasts than rate hike
- Most recent data, plus lack of guarantees on fiscal stimulus, should cap Fed’s dots at three hikes per year
- Even so, markets will want to see if long-run policy rate target rises above 3%
- Credit Suisse (James Sweeney, others, note)
- SEP to shift in more hawkish direction; rate projections are likely to drift higher for approaching years and possibly even in long run
- While FOMC’s core members should stay put at three hikes for 2017, “the risk of a hawkish surprise is substantial”
- Goldman Sachs (Jan Hatzius, others, note)
- “Close call” whether FOMC hikes three or four times in 2017, but there should be earlier balance-sheet normalization
- Fed rate increases are now seen in March, June and September vs previous expectation of March, September and December
- Forecast for start of balance-sheet normalization pulled forward to 4Q 2017 from mid-2018
- MORE
- Market Securities (Christophe Barraud, note)
- Base case is that FOMC’s median dot continues to signal three hikes in 2017; seems “a bit risky” to move to four hikes, given lack of details about U.S. budget
- 2018 median dot is even less likely to be changed, and there’s “no reason to expect a significant change” in 2019 or long-run projections
- Fed’s 2017 forecast for GDP and core inflation should move higher, while statement will send slightly hawkish signal; even so, Yellen is likely to be more balanced in her press conference
- RSM (Joseph Brusuelas, blog)
- Fed is likely to suggest fourth rate increase this year and raise both growth and inflation forecasts, while sticking with three hikes in 2018
- Central bank is adjusting to improving economic fundamentals and acknowledging expected expansionary fiscal policy
- Saxo Bank (John Hardy, interview)
- Feb. employment data backs Fed rate increase on Wednesday, even though that report itself doesn’t boost market expectations for more hikes this year
- “This is Goldilocks data -- just right for Fed to hike, but not enough to accelerate what is already priced in”
- SocGen (Kit Juckes, note)
- FOMC’s announcement Wednesday “is all about” the projections, instead of whether it raises rates
- SocGen’s U.S. economists say that 2017, 2018 dots probably won’t move; beyond that, upward adjustment is possible to send signal to market that FOMC is serious about normalizing policy
- TD Securities (Michael Hanson, others, note)
- Base case, which is given 60% odds, has median dots continuing to suggest three hikes in 2017 and 3% long- run rate despite upward drift in forecasts
- There’s “modest” risk of higher median 2018 dot; increase in median 2019 dot is likely
- MORE
- UBS (Samuel Coffin, note)
- Fed won’t likely signal four hikes this year; would require four FOMC members to bump up their projections and recent data don’t support such a shift
- Slowdown in bank lending, recent drop in real consumer spending are among factors that keep FOMC to three hikes in 2017
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Chris Rupkey (Bank of Tokyo-Mitsubishi UFJ Ltd/The)
Christophe Barraud (Kyte Group Ltd/The)
Dana Peterson (Citigroup Inc)
James Sweeney (Credit Suisse Group AG)
Jan Hatzius (Goldman Sachs Group Inc/The)
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