fomc monpol decision preview (mar 2017)
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WHEN

FOMC Decision & Release Of Economic Projections: Wednesday 15th March 2017, 18:00 GMT (19:00 CET, 14:00 ET)

 

FOMC Chair Janet Yellen’s Press Conference: Wednesday 15th March 2017, 18:30 GMT (19:30 CET, 14:30 ET)

SENDING CLEAR SIGNALS

All of those surveyed by Reuters expect the Federal Open Market Committee (FOMC) to raise the target range for its federal funds rate by 25 basis points to 0.75%-1.00%.

 

Heading into the two-day meeting Fed officials have recently delivered a burst of hawkish rhetoric. The most marked comments came from the usually dovish governor Lael Brainard suggesting that “it will likely be appropriate soon to remove additional accommodation.” New York Fed president William Dudley seemingly rubber stamped the March hike when he also lent towards the tightening end of the spectrum, suggesting that “the prospects for adding to the December 2016 rate increase had become a lot more compelling.” But, it was left to Fed Chair Janet Yellen to deliver the final blow, noting that “it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect.”

 

The hawkish Fed rhetoric was supplemented by a strong nonfarm payrolls report. February’s 235,000 rise in payrolls alongside a drop in the unemployment rate to 4.7%, coupled with an inflation rate pushing towards the Fed’s 2% target, point towards the Fed being closer to fulfilling its dual mandate.

 

Some anticipate a change in in the Fed’s rhetoric via the accompanying statement, with suggestions that the FOMC’s view on the economic outlook could shift to a more neutral “balanced” from “roughly balanced” and maybe a mention of a “net upside risk” to the economy.

SHIFT IN MARKET EXPECTATIONS
SECOND GUESSING FISCAL POLICY

US President Trump’s fiscal policy pledges (although light on detail) are also adding credence to calls for monetary tightening.

 

Many analysts suggest that a reduction in the size of the Fed’s balance sheet is still a year away. The topic has gathered more air time in recent Fed communique, although focus in the statement is likely to fall on the trajectory of interest rates going forwards.

 

“There’s the small fear that if they don’t go now, Q1 data and the European elections could make subsequent rate increases more difficult to justify,” Keith Grindlay, central bank watcher at Macro Thoughts, told LiveSquawk News.

 

Grindlay has been forecasting that US and global growth will come in below consensus in the first half of the year.

 

OIS are now pricing in a 96.0% chance of a 25bps hike this time out, with 66.25bps worth of tightening priced in for 2017 (or a 65% chance of three hikes this year), while the median on the Fed’s dot plot currently looks for three hikes.

 

A Reuters poll expects the ‘dot plot’ in the March SEP to continue to show a total of three hikes in 2017, with a year-end fed funds target of 1.375%. JPMorgan’s chief economist Bruce Kasman is now looking for the March ‘do plot’ to shift up and indicate a median of four rate hikes in 2017. 

FOMC DOT PLOTS
FOMC Dot Plots
FOMC Dot Plots
OUTLOOK FOR MONETARY POLICY

The outlook for US monetary policy is somewhat clouded on the back of political risks (both domestic and international) alongside benign global inflation and stuttering growth, hence a broad divergence in views regarding Fed policy moving forwards, as highlighted by the comments from two leading forecasters below:

 

“If substantial fiscal stimulus is implemented, Fed officials have indicated that it might then be appropriate to tighten monetary policy at a faster pace than currently intended to balance the impact on inflation that might result,” wrote HSBC in its recent FOMC Outlook.

 

Whilst, Eric Lascelles, chief economist at RBC Global Asset Management wrote, “because this is a ‘major’ Fed meeting, there will be plenty of opportunities for the Fed to signal if it still believes three total tightening efforts are still appropriate for 2017, with another three scheduled for 2018. There is a risk that they upgrade this plan given economic strength. But our suspicion is that they won’t, as the market already has a lot to digest given the sudden uptick in the pace of tightening from once per year to – for the moment – once per quarter.”

 

NB – Please note that as of writing, the FOMC two-day meeting will proceed as planned, despite Storm Stella hitting the east coast of America. 

DECEMBER FOMC PROJECTIONS
Economic Projections of Federal Board members Presidents
Economic Projections of Federal Board members Presidents
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