HALISTER1: RESEARCH ROUNDUP: Market Looks to Fed Balance-Sheet Language

RESEARCH ROUNDUP: Market Looks to Fed Balance-Sheet Language

(Bloomberg) -- FOMC will likely affirm labor market’s strength, upgrade inflation assessment and keep rates unchanged Feb. 1 as policy makers await more detail on Trump administration’s policies, based on published research by economists and strategists.
  • Debate on ending reinvestments will probably continue at Jan. 31-Feb. 1 meeting, says Standard Chartered economist Thomas Costerg
    • Market will likely be especially focused on fifth paragraph relating to outlook for balance sheet and reinvestment policy: JPMorgan economist Michael Feroli; language is poised to stay same
  • NOTE: Much of pre-FOMC meeting commentary has focused on Fed’s portfolio; see also Research Roundup: Fed could shrink balance sheet, cause UST volatility
  • Market-implied probabilities for next hike are below 50% through March meeting; fed fund futures fully pricing in a 25bp increase ~June; Jul17 implied rate ~90bps, above midpoint of 75bp-100bp target range
  • Barclays (Michael Gapen, Rob Martin, Blerina Uruci)
    • Fed will take definite 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
  • BofA (Michelle Meyer, others)
    • Statement will reflect greater conviction about reduced labor-market slack, upward trend of inflation
    • Delays in fiscal stimulus, potentially greater trade tensions lead to “out-of-consensus” forecast for slow growth of 1.5% in 1H
    • BofA still expects one rate increase this year, likely in September; says second hike in 2017 could be “close call”
    • 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% and risks to outlook as “roughly balanced”
    • MORE
  • Standard Chartered (Costerg)
    • Fed will likely discuss timing of balance sheet’s “passive shrinking,” yet debate probably won’t be mentioned in statement
    • 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
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Thomas Costerg (Standard Chartered PLC)
Blerina Uruci (Barclays PLC)
Ellen Zentner (Morgan Stanley)
Matthew Hornbach (Morgan Stanley)
Michael Feroli (Bear Stearns & Co Inc)

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