HALISTER1: RESEARCH ROUNDUP: Fed Seen Tearing Up Script on Rates

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: HALISTER1
Source: 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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