Halister News

(Bloomberg) -- FOMC’s rate projections are seen as drawing more attention than any balance-sheet announcement Wednesday, based on published research by analysts; tapering of Fed’s $4.47t portfolio is seen as a given, with rates expected to remain unchanged for now.   

• RBC sees potential for 2020 median dot to show Fed’s tightening cycle is coming to an end; FTN, Morgan Stanley say long-run dot could fall to 2.75% from 3%
• NOTE: Traders have boosted the odds of a hike by December to ~50%; MBS analysts retain recommendations amid expectations that Fed will announce balance-sheet unwind today

BofA (Michelle Meyer, others)

• Any shift lower in 2019 or longer-run dots would support a steeper curve, given potential for a more patient Fed to allow for a shift upward in inflation
• Real question is when the Fed will hike again and whether it will continue raising rates over next two years
• MORE

Credit Suisse (Shahab Jalinoos, others)  

• FOMC could upend “broad USD negative view”  
• Three possible scenarios seen for a USD-positive surprise; one is the Fed makes clear through dot plot that another 2017 hike is highly probable, possibly as soon as November
• MORE

ING (Viraj Patel)

• Fed’s dot plot will likely reflect a reduced conviction on the pace and extent of future tightening
• More policy makers are likely to predict no more hikes this year, while 2018 and longer-run dots may move lower
• USD will resume weakening after FOMC meeting
• MORE

Morgan Stanley (Matthew Hornbach, others)  

• Lower median long-run dot is the biggest risk to call by Morgan Stanley economists for status quo; dot could fall to 2.75% from 3%  
• Next biggest risk is a lower median 2018 dot, which could fall to 1.875% from 2.125%, followed by possibility that Yellen takes a “more dismissive line” toward downside surprises in inflation data 
• Balance-sheet normalization should attract the least amount of attention
• Investors should enter tactical UST 2s30s flatteners, given risks to outcome of FOMC meeting

Allianz Global Investors (Franck Dixmier)  

• Fed will probably adopt a slightly less dovish tone than markets are expecting; this should enable policy makers to adjust forward guidance to pave way for a December rate increase
• Strength of U.S. economy and the state of jobs market make a future acceleration in inflation more likely, which would justify a “pre-emptive” hike

Bloomberg Intelligence (Carl Riccadonna, Yelena Shulyatyeva)  

• Meeting will mark a “watershed moment in the era of unconventional monetary policy”
• Reduction in Fed’s asset holdings runs risk of “unforeseen market consequences”
• In order to provide a buffer, Fed officials will likely signal a slower pace of interest-rate increases, although they’ll probably stand by their intent to hike again before year-end
• MORE

FTN (Chris Low)  

• Long-run dot could drop to 2.75% from 3% if just two participants shift expectations a quarter-point lower
• More likely that the 2017 dot will stay the same and the 2018, 2019 and long-run dots will shift
• Combined message of Fed’s summary of economic projections and Yellen’s press conference will tilt dovish

JPM (Michael Feroli)

• Dots will be “most-watched development” of meeting
• While more FOMC participants may expect no more hikes this year relative to June forecasts, it won’t be enough to bring down median dot
• Fed will continue to be at odds with current market pricing for 2018-2019 outlook; see MORE
• In separate note, strategists led by Matthew Jozoff said a JPM survey of MBS investors found they have a “nonchalant attitude” toward Fed’s tapering

Market Securities (Christophe Barraud)  

• Statement and shift lower in inflation projections for 2017 could send a dovish signal  
• Third rate increase this year is likely to still be reflected in dot plot; however, Yellen will probably be cautious in her press conference about the prospect of another hike in 2017
• Inflation assessment is likely to be downgraded again, given recent weakness wasn’t due to just transitory factors

Pictet Wealth Management (Thomas Costerg)  

• Fed will probably hike by quarter-point in December and again in March; “beyond that, the outlook gets muddier”
• “The Fed’s dots are too optimistic, especially beyond 2018”
• Some policy makers will probably reduce their expectations for terminal rate of this tightening cycle; median dot for terminal rate could drop to 2.75%

RBC (Tom Porcelli, Jacob Oubina, Michael Cloherty)  

• Release of 2020 dot for first time raises question of whether policy makers will show tightening cycle coming to an end
• Cycle could effectively end with fed funds rate at 2.9% in 2019 or 3% in 2020; alternatively, policy makers might show hikes beyond 3% neutral rate in 2020  
• MORE

Wrightson ICAP (Lou Crandall)

• Big question is how Fed will frame debate about possible hike in December
• Fed should tighten again in December, but data may not let policy makers do it
• MORE

--With assistance from Alexandra Harris, Alexandria Arnold and Katherine Greifeld. To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Greg Chang