Fed preview from the Banks

Below is a selection of comments from some of the biggest banks ahead of this evening’s Fed decision.

 

Goldman Sachs

It's all about the word 'accommodative' in the FOMC statement, according to Goldman Sachs.

Economists there are in line with the consensus and expecting a 25 basis point hike to a range of 2.00%-2.25%. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation," the statement currently says.

Goldman says the word accommodative is "a touch more likely than not to remain." That follows a note in the FOMC Minutes that said removing the word would "at some point fairly soon" be appropriate.

The implication of leaving it in is that more hikes will be needed. So leaving in 'accommodative' will be bullish for the dollar and negative for risk assets. The reason that GS believes it will stay is that forecasts for the neutral rate (r*) are now slightly higher than they believed in August, so even by hiking, policy will still be below neutral.

Goldman thinks it will ultimately be removed at the December meeting after a fourth hike this year. They don't believe it should matter but say it will be a focus on investors.

 

Economic projections

Goldman Sachs economists expect no changes in the median path of the dot plot despite a slight bias higher. On the long-term dot plot, they see a shift in the  longer-run or neutral rate dot appears likely to move up slightly to 3%

However this will be the first meeting where the Fed extends the dot plot to 2021. Economists at Goldman believe the dot plot there will flatten out at 3.25-3.50%.

In terms of economic projections, they looked at the changes in economic data and note few shifts since the June FOMC. They believe 2018 GDP will be revised to 3.0% from 2.8% but the unemployment forecast inching to 3.7% from 3.6%. For 2019 and 2020 they don't see any reason for changes.

For the initial 2021 estimate, they see 1.7%.

Citigroup

 

Citi says the median projections for future rate increases by US Fed committee members may tilt to the dovish side.

Economist Andrew Hollenhorst also thinks officials may remove the word "accommodative" from the Fed's policy statement.

The Fed's 12-member voting group rotates across different Fed offices so its composition changes over time.

On this occasion there's an incoming member — the Fed's newly appointed vice-chair Richard Clarida.

"Clarida may be more dovish than former New York Fed president William Dudley," Hollenhorst said.

Dudley's vote will be replaced by new NY Fed president John Williams.

"Fed officials may also remove the reference that policy is 'accommodative' from the statement," he added.

Dropping "accommodative" would be dovish, because it indicates committee members are of the view that the Fed is now closer to the end of its current tightening cycle.

Hollenhorst said he will also be keeping an eye out for any commentary from the Fed on its balance sheet reduction plan.

He noted the the effective federal funds rate (EFFR) — a gauge of short-term liquidity in the US financial system— has been moving towards the top of the Fed's target 0.25% range.

That "has prompted speculation that balance sheet reduction may be stopped early, although we expect it will continue through 2019," Hollenhorst said.

"However, we do not expect any clear guidance from Fed officials at this meeting."

 

TDS

The takeaway from the Fed will boil down to a few key signals, according to Mark McCormick, North American Head of FX Strategy at TD Securities.

 

Key Quotes:

“First, the signal on the neutral is critical since it signals a possible endgame over the next few years. We think the median longer-term dots drop to 2.75%. Second is whether the Fed still feels the policy stance is accommodative. Any modification to that language would be a dovish surprise.”

“We are not downplaying that there will be some hawkish elements to the meeting. Indeed, the 2018 dots could show more support for a fourth hike but the market is already pricing in two more hikes next year after today's meeting. The dots already imply an overshoot of the terminal rate above 3% and we simply think the bar is high for a hawkish surprise.”

“That means there is plenty of room to fade any knee-jerk reaction, but on balance, we think the USD ends the day lower.”

 

ABN Amro

Bill Diviney, Senior Economist at ABN AMRO, suggests that today’s FOMC decision will not have any market impact as 25bp rate hike by the Fed has been close to fully priced for at least a month.

 

Key Quotes

“The much bigger focus will be on to what extent the recent hawkish shift among FOMC doves – evident in recent public commentary – will translate to projections for more rate hikes over the coming years. While we expect the ‘dots’ for 2018, 2019 and 2020 to shift upward, we believe this upward shift will be concentrated among doves rather than hawks, and this should keep the all-important median projections unchanged.”

“Already, the median projections are for one further rate hike this year, and an additional three hikes next year. This is somewhat more hawkish than will likely be thought necessary when the time comes, in our view (we project two rate hikes next year).”

“Unless the centrists and moderate hawks also shift their rate projections higher, we think the medians for all years will remain unchanged (2018: 1 further hike; 2019: 3 hikes; 2020: 1 hike).”

“We expect Chair Powell in his press conference to temper any overly hawkish interpretation of the ‘dots’.”