HALISTER1: RESEARCH ROUNDUP: Fed Seen Turning Cautious After Rate Hike

RESEARCH ROUNDUP: Fed Seen Turning Cautious After Rate Hike

(Bloomberg) -- (Adds Goldman Sachs, TD, UBS to item published Dec. 9.)
  • FOMC is unlikely to alter its forecast for two rate hikes in 2017 in today’s decision and probably won’t adjust longer- term dots by much as it’s too soon to judge economic impact of Trump administration policies, based on published research from economists and strategists.
  • Rate hike is regarded as a virtual certainty; market-implied probabilities stand at 100% and fed funds futures are fully pricing one move; all 103 Bloomberg-surveyed economists expect a 25bp increase
  • BNP, JPMorgan, Morgan Stanley are among those expecting Fed to keep 2017-2018 dots the same or little changed
  • Rising expectations for growth and inflation, as well as tightening U.S. labor market, should give data-dependent Fed confidence to hike for first time this year; cautious Fed seen by some as looking to avoid rattling markets, wait for details on Trump’s plans
  • See also: Research Roundup: U.S. jobs data opens way for Fed
  • BNP (U.S. economics team)
    • Fed to hike fed funds rate by 25bps; expect little guidance beyond what’s already in Fed’s projections
    • Statement could include upgraded assessments in first paragraph, description of risks as appearing “balanced”
    • No changes seen to Fed’s median dots; too early for big changes to summary of economic projections; most on FOMC will probably wait for more clarity
    • “Elephant” at Yellen’s press conference is question of how Fed will respond to changes in fiscal outlook; impact remains “highly uncertain”
    • MORE
  • BofAML (Candace Browning, others)
    • Market’s expectation for Fed hikes in coming years has room to rise
    • Inflation “party” has started, with core PCE expected to rise to 1.9% by end of 2017, “approaching if not overshooting the Fed’s 2% inflation target”
    • Economist Michelle Meyer expects Fed to hike once in 2017, three times in 2018; any signs of concern from Fed regarding USD strength would limit short-term USD gains
    • MORE
  • Citi (Dana Peterson, Andrew Hollenhorst, others)
    • Fed may make few, if any, adjustments to its growth and inflation forecasts
    • Renewed USD strength and back-up in yields may ultimately exert drag on U.S. growth and inflation
    • Recent moves in interest rate, currency markets aren’t likely to be enough to affect Fed’s 2017 forecasts now
  • Credit Suisse (Praveen Korapaty, others)
    • Market isn’t pricing in enough risk of Fed hikes in 2017-2018; Trump administration is likely to have passed some fiscal initiatives by 2H 2017-1H 2018
    • In phone interview, Korapaty said “we will probably get a small move up in dots;” Fed’s meeting could be a “catalyst” for markets to start repricing number of hikes expected in 2017-2018, if statement or Yellen’s press conference is more hawkish than expected
    • MORE
  • Deutsche (Joseph LaVorgna, others)
    • Policy makers will have little reason to lower their long-run rate forecasts further, especially since upside risks to growth have increased considerably; they will likely view their longer-run fed funds projections as “just right”
    • Fed will likely be “encouraged” by convergence of markets’ outlook toward its forecasts
  • Goldman (Robin Brooks, Michael Cahill)
    • Fed is likely to break trend of downward revision to policy rate path, marking “a turning point for the dollar”
    • USD may rise after FOMC meeting
    • Firm’s 12-month forecast for USD/JPY is raised to 125 from 115; 24-month forecast remains at 130
    • MORE
  • JPM (Michael Feroli)
    • Statement will take no view on prospects for fiscal policy; Yellen to stress that it’s premature to change economic or Fed policy outlook
    • No dissents expected in decision to hike
    • Median dot for 2017 will continue to suggest two hikes; JPM sees no compelling reason for major changes to 2018 or 2019 dots; FOMC may take “breather” on adjusting long-term dot
    • MORE
  • Morgan Stanley (Ellen Zentner, Ted Wieseman, others)
    • Trump’s economic agenda suggests Fed’s forecasts for growth and policy “look achievable,” which should lead to hikes next year in September and December; three more seen in 2018
    • Fed will stick to its path for target rate for now; expect slight downward revision to NAIRU and longer-run neutral rate
    • Market possibly pricing in a “decent probability” that median dots shift higher at FOMC meeting, though current market expectations are along FOMC’s projections
    • MORE
  • Standard Chartered (Thomas Costerg)
    • FOMC will want to avoid any unnecessary volatility and “meddling in politics” so its economic forecasts will be little changed
    • Changing its forecasts “radically” up or down would probably be seen as politically validating or rejecting Trump’s policy platform
    • “Status quo could be a relatively safe option”
  • TD (Brittany Baumann, others)
    • FOMC to emphasize its patient stance beyond December; expect little change to economic projections and unchanged pace of normalization in dots
    • Base case implies “relatively quiet landing” for USD, with most of upside potential realized before meeting
    • Yellen likely to mention USD strength, room for further decline in labor market slack
    • MORE
  • UBS (Drew Matus, others)
    • Current distribution of dots is at risk of faster pace of tightening “across the entire forecasting horizon”
    • Only two policy makers would need to move their 2017-2019 outlooks higher to produce a higher median
    • Long-run forecast could move if just one forecast shifts between a 2.75%-3% rate
    • MORE
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Andrew Hollenhorst (Citigroup Inc)
Brittany Baumann (Toronto-Dominion Bank/The)
Candace Browning (Bank of America Corp)
Dana Peterson (Citigroup Inc)
Drew Matus (UBS Asset Management Japan Ltd)

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