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9/19/16

Vampire Squid on FOMC

GS says "no hike". I agree

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  • After the August employment report we had thought a rate increase at this month’s FOMC meeting had slightly better-than-even odds. However, Fed officials made no concerted effort to raise market expectations over the last two weeks, and the FOMC almost never surprises with a hike. As a result, we now see very low chances (<5 a="" font="" increase="" next="" of="" rate="" week.="">
  • The skewed odds should not be taken for a unified committee, however. By our count, seven FOMC participants would prefer to raise the funds rate next week, and two seem to be leaning that way. In these situations, the FOMC will often use the post-meeting statement to help forge a compromise. We should therefore expect a more hawkish tone in the statement and press conference.
  • While we expect some tough talk, our best guess is that the statement will be sufficiently noncommittal to keep markets unsure about the prospects of a rate hike this year—in part because the timing of the November meeting limits the committee’s ability to provide very strong signals. Shifting to a “nearly balanced” risk assessment could keep markets on notice, but this phrasing has been absent since December, possibly reflecting Chair Yellen’s own preferences. It’s a close call, but we think the committee will probably use different language.
  • In the Summary of Economic Projections (SEP), we look for lower GDP growth for this year and a reduction in the longer-run estimate. Projections for unemployment and core inflation will likely be unchanged. Reflecting the discussion among policymakers about low equilibrium rates, we expect the “dot plot” to show a slower pace of funds rate increases over the coming years, with the 2017 and 2018 median dots falling by 50bp—though this is also a close call.
  • After another large downshift in the dots, can we still say that the FOMC is executing the plan it laid out in December, or has its strategy fundamentally changed? While we have been surprised by some of the recent communication, our view remains that the committee’s basic framework has not changed. Markets remain skeptical, however, and Chair Yellen may need to articulate where she stands in the post-meeting press conference.


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