IKN

Trifles light as air

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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