HALISTER1: RESEARCH ROUNDUP: Market Focused on Fed’s Balance Sheet Debate

RESEARCH ROUNDUP: Market Focused on Fed’s Balance Sheet Debate

(Bloomberg) -- (Updates BofAML and FTN and adds TD to item published Jan. 27.)
  • FOMC will likely keep rates unchanged Wednesday as policy makers await more detail on Trump administration’s policies, based on published research by economists and strategists; pre-FOMC meeting commentary focuses more on Fed’s portfolio.
  • Debate on Fed’s reinvestment policy will probably occur at 2-day meeting that starts today, yet won’t be mentioned in statement, say Standard Chartered economist Thomas Costerg and BofAML’s Michelle Meyer, Ian Gordon, others
    • While market will likely be looking at fifth paragraph on outlook for balance sheet, reinvestment policy, language should stay same, says JPMorgan economist Michael Feroli
  • See also Research Roundup: Fed could shrink balance sheet, cause UST volatility
  • Market-implied probabilities for next hike are below 50% through May meeting; fed fund futures fully pricing in a 25bp increase ~June; Jul17 implied rate 87.5bps, midpoint of 75bp-100bp target range
  • Barclays (Michael Gapen, Rob Martin, Blerina Uruci)
    • Fed will take definitive stand on labor market
    • Statement will reflect view that labor market is at or near full employment
    • Barclays still expects any balance-sheet reduction to occur through partial rollover of maturing securities; “outright assets sales are extremely unlikely”
    • MORE
  • Bloomberg Intelligence (Michael McDonough)
    • Fed to settle on same outcome as BOE and BOJ this week: no change in policy and updates to economic assessments
    • U.S. economy’s continued “encouraging” acceleration in y/y growth trend will be enough to keep Fed on gradual tightening path, yet probably at slower pace than projected in December
    • MORE
  • BofAML (Michelle Meyer, others)
    • Statement to be perceived as “bit more hawkish,” will likely mention reduced labor-market slack, may note improved confidence measures
    • Could result in further steepening of near-term path of monetary policy, increase market-implied probabilities for March hike; greater FOMC confidence could provide some reprieve to USD, as market focuses on balance of risks around Fed policy
    • Fed hasn’t pulled forward timing for ending reinvestments, despite recent mention of policy in its communications; likely to begin ending reinvestments when fed funds target range is 1.25%-1.5%
  • FTN (Christopher Low)
    • Expecting “no rate hike and no significant change in guidance”
    • FOMC also won’t be able to signal clear intent to hike in March, given committee’s commitment to using neutral rate as policy guide
    • Policy makers are already ~50bps above the last neutral rate, based on data rather than forecast; “doesn’t make sense to hike again until the gap shrinks a bit”
    • In separate note, strategist Jim Vogel said Fed may have to hold off on short-term rate hikes to study “interference caused by its need to cut the portfolio size”; investment/rate-hike “balancing act” will arrive in 2018
    • MORE
  • JPMorgan (Feroli)
    • Forward guidance to repeat outlook for “gradual” hikes
    • Statement will likely stop short of speculating on a move in March; overall tone should remain upbeat
    • FOMC to say risks to outlook are “roughly balanced,” and “play it safe” by not speculating on any changes to fiscal or other federal economic policies
    • MORE
  • Morgan Stanley (Ellen Zentner, Matthew Hornbach, others)
    • Fed will likely hold off on raising rates until September
    • Odds of March hike appear low as Fed looks for inflation pressures to build and fiscal policy to take hold
    • Policy makers will deliver “positive-sounding,” “benign” statement keeping fed funds rate at 0.5%-0.75%
    • MORE
  • RBC (Tom Porcelli)
    • No Yellen press conference means “little scope” for major shifts; meeting should “come and go with little market implications”
    • Fed may upgrade inflation description with slightly more hawkish slant; “way too early” for reinvestment discussion to make its way into the statement
    • Looking ahead, there’s “good chance” Fed will talk more about balance sheet reduction rather than hiking outright in March; “very strong data” and “clear signs” that fiscal/tax reform is on accelerated timeline are needed for March hike to occur
  • Standard Chartered (Costerg)
    • Fed will likely discuss timing of balance sheet’s “passive shrinking”
    • Issue may appear in minutes of meeting, may be further discussed at March meeting
    • Fed will keep rates on hold for several months; Standard Chartered sticks with prior call for next hike in December, sees end of reinvestments in 1Q 2018
    • MORE
  • TD (Michael Hanson, others)
    • Fed won’t send any “overt” signals about March; “very low chance” Fed will change fifth paragraph on reinvestment program
    • Central bank is preparing markets for “more serious conversations down the road”; discussions expected to start “in earnest” around early 2018, with tapering process beginning in mid-2018
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Blerina Uruci (Barclays PLC)
Christopher Low (Ftn Financial)
Ellen Zentner (Morgan Stanley)
Ian Gordon (Bank of America Corp)
Jim Vogel (Ftn Financial)

To de-activate this alert, click here

UUID: 7947283