A moderating economy in tandem with tighter financial conditions should lay to rest any prospect of a December hike. Nonetheless, Wednesday’s decision was unlikely to see policymakers signal a more dovish stance just yet, say experts.
The Federal Open Market Committee (FOMC) is widely expected to keep the benchmark interest rate within its range of 5.25% -5.50%. With attention focused on the ensuing press conference, several analysts put the likelihood of any material change in the opening statement and language at a minimum.
Bank desks pointed out that the December event comes against a different backdrop from the last two meetings. “The September meeting was during a period of very strong economic data, while the November meeting came amid a mixed slate of data,” Morgan Stanley’s Ellen Zentner noted. “The December meeting, however, comes amid a clearer deterioration in economic data.”
On Tuesday, the US reported a slight cooling of consumer prices last month, with the headline rate up 0.1% m/m versus a flat expectation, as the fall in energy prices was largely offset by a rise in food costs. Annually, inflation grew 3.1%, matching estimates. The closely watched core read rose an in line 0.3% m/m and 4.0% y/y.
“This fairly benign CPI report suggests that inflation is on a path to two percent barring an economic shock,” writes Nationwide Financial Markets Economist Oren Klachkin of this morning’s November CPI data release. “We expect cooler inflation readings in 2024, but a return to two percent is unlikely in the very near term.
Updated staff forecasts
Revised dot plot and staff projections are expected to reflect this evolution in activity when they are released alongside the statement.
In the Summary of Economic Projections (SEP), the growth estimate for this year is forecast to be revised up and the core PCE revised down relative to the most recent estimates from September analysts predicted.
“We expect GDP growth this year to mark-to-market higher, incorporating the 5.2% q/q annualised real GDP growth reported in Q323,” Zentner said. However, the bank expected projections further out to be left largely unchanged.
Economists noted that core PCE inflation had consistently undershot the Fed's projections. “We expect the SEP to mark-to-market lower this year from 3.7% Q4/Q4 growth to 3.5%. We expect the rest of the path for core PCE inflation to move down as well,” Zentner added.
Lastly, the lender predicted updated dots would show no hike in December, moving 2023 down from 5.6% to 5.4%. In 2024 and 2025, Zentner anticipated a 50 basis points downward shift and estimated that for 2024, it would only take one dot currently at 5.1% to move to 4.8% to shift the median down 25bps next year.
Powell’s all important Christmas message
Most analysts agreed that the majority of Fed officials have actively discouraged market expectations for any near-term easing.
JP Morgan’s Michael Feroli argued that while there was a case that risks had become more two-sided, he noted that Chair Jerome Powell recently opined that “it would be premature to conclude that we have achieved a sufficiently restrictive stance.” The investment banker said he believed Powell’s view would hold sway and the bias to tighten would be left intact.
However, BofA expected the US central bank to take the initial steps in changing its communication from hawkish holds to dovish holds. “In our view, the committee is not ready to shift from a tightening bias, all the way to an outright easing bias. In the next three to four months, it is likely the case that many FOMC members would view a potential hike as slightly more likely than a cut. We think the committee can take the initial step of making its policy rate outlook more balanced by changing the existing language in the FOMC statement."
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- Committee set to leave policy unchanged
- Board members seen discouraging talk of rate cuts
- Revised staff projections to lower growth and inflation targets
- Decision due Wednesday at 19:00 GMT / 14:00 EST
- Press conference scheduled for 19:30 GMT / 14:30 EST
By Harry Daniels
LiveSquawk News
@HarryDaniels71
12 December 2023 | 22:20 GMT
A moderating economy in tandem with tighter financial conditions should lay to rest any prospect of a December hike. Nonetheless, Wednesday’s decision was unlikely to see policymakers signal a more dovish stance just yet, say experts.
The Federal Open Market Committee (FOMC) is widely expected to keep the benchmark interest rate within its range of 5.25% -5.50%. With attention focused on the ensuing press conference, several analysts put the likelihood of any material change in the opening statement and language at a minimum.
Bank desks pointed out that the December event comes against a different backdrop from the last two meetings. “The September meeting was during a period of very strong economic data, while the November meeting came amid a mixed slate of data,” Morgan Stanley’s Ellen Zentner noted. “The December meeting, however, comes amid a clearer deterioration in economic data.”
On Tuesday, the US reported a slight cooling of consumer prices last month, with the headline rate up 0.1% m/m versus a flat expectation, as the fall in energy prices was largely offset by a rise in food costs. Annually, inflation grew 3.1%, matching estimates. The closely watched core read rose an in line 0.3% m/m and 4.0% y/y.
“This fairly benign CPI report suggests that inflation is on a path to two percent barring an economic shock,” writes Nationwide Financial Markets Economist Oren Klachkin of this morning’s November CPI data release. “We expect cooler inflation readings in 2024, but a return to two percent is unlikely in the very near term.
Revised dot plot and staff projections are expected to reflect this evolution in activity when they are released alongside the statement.
In the Summary of Economic Projections (SEP), the growth estimate for this year is forecast to be revised up and the core PCE revised down relative to the most recent estimates from September analysts predicted.
“We expect GDP growth this year to mark-to-market higher, incorporating the 5.2% q/q annualised real GDP growth reported in Q323,” Zentner said. However, the bank expected projections further out to be left largely unchanged.
Economists noted that core PCE inflation had consistently undershot the Fed's projections. “We expect the SEP to mark-to-market lower this year from 3.7% Q4/Q4 growth to 3.5%. We expect the rest of the path for core PCE inflation to move down as well,” Zentner added.
Lastly, the lender predicted updated dots would show no hike in December, moving 2023 down from 5.6% to 5.4%. In 2024 and 2025, Zentner anticipated a 50 basis points downward shift and estimated that for 2024, it would only take one dot currently at 5.1% to move to 4.8% to shift the median down 25bps next year.
Most analysts agreed that the majority of Fed officials have actively discouraged market expectations for any near-term easing.
JP Morgan’s Michael Feroli argued that while there was a case that risks had become more two-sided, he noted that Chair Jerome Powell recently opined that “it would be premature to conclude that we have achieved a sufficiently restrictive stance.” The investment banker said he believed Powell’s view would hold sway and the bias to tighten would be left intact.
However, BofA expected the US central bank to take the initial steps in changing its communication from hawkish holds to dovish holds. “In our view, the committee is not ready to shift from a tightening bias, all the way to an outright easing bias. In the next three to four months, it is likely the case that many FOMC members would view a potential hike as slightly more likely than a cut. We think the committee can take the initial step of making its policy rate outlook more balanced by changing the existing language in the FOMC statement."