Fed: Wednesday's Expected Takeaways

Published on June 16, 2014

With the Federal Open Market Committee’s statement, Summary of Economic Projections with their always fun to see rate dot plots, and Chair Janet Yellen’s second press conference due this coming Wednesday afternoon, we had just a few follow-up observations to add to our more in-depth report of last week, SGH 6/10/14, “Fed: Three Themes to June.”

*** An acceleration in the tapering of bond purchases is highly unlikely this week as is any signaling that the first rate hike is being brought forward. It is simply too early for either change. Nor is Chair Yellen likely to follow the Bank of England Governor Mark Carney in a suddenly hawkish shift in messaging. The Fed is not the Bank of England nor is the US economy at the same stage of a recovery as the much smaller UK economy. ***

*** The FOMC is instead very likely to stick to its two track messaging that it will be a considerable time after the end of the QE taper before the first hike in interest rates — a time frame still assumed to be in the second half of next year — and that the Committee still assumes the rate tightening trajectory is far more likely than not to be gradual. The Fed, in other words, will be barely moving off, if at all, from its highly accommodative near term policy path even as it tweaks its economic forecasts and continues the tapering in its bond purchases by another $10 billion a month. ***

*** The Fed has remained essentially unmoved around a market which has swung from a massive if unexpected rally of a few weeks ago to chatter in recent days of much more hawkish expectations of an acceleration in the taper or guidance to bring the expected rate hikes forward. But if there is a more hawkish reading to the rate blue dots or Chair Yellen herself, it is unlikely to be due to a shift in Fed messaging but rather a continued correction to the market pricing that has been so unexpectedly well under the Fed’s consensus rate path. ***

*** We still believe September is the earliest possible meeting for a pivot in the Fed’s forward policy guidance, for two reasons. The first is that the Fed will simply want to wait to see how the data plays out in the coming months, especially with wage growth and inflation. And second, it will probably take until September for a consensus on any change in guidance to take shape. The FOMC is built to reach a consensus on difficult policy choices, but not necessarily for the same reasons, and sometimes it takes longer than ideal to get there with a barest of dissents if any at all. ***

*** The same especially applies to the rethink on the sequencing of the Exit. Nothing definitive will be announced this week, though we do continue to think the balance within the FOMC is moving towards a priority on rate policy in the first phase of the Exit, meaning the end to re-investments will be put off until after the Fed gets a better handle on the sensitivity further out the curve to a tightening in short rates and especially its transmission into the real economy. ***

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