That’s why I’m calling today’s FOMC meeting the most crucial inflection point since 1929.
Finally for those confused by wave after wave of nonsensical positivity heading into the FOMC's tightening announcement (if it is so good for stocks, why did the Fed keep rates at 0% for 7 years and why did it inject trillions into the market), here is a less than bullish forecast on how things play out from DB's Jim Reid.
In terms of what we should expect from the post-meeting statement today, we don’t expect there to be much change to the opening statements on economic developments and prospects. We expect the Fed to continue to sound relatively upbeat on the US economy, reflecting Yellen’s recent speech and testimony although it is possible that we see a subtle change in terminology around the balance of risks on the outlook for economic activity and the labour market from ‘nearly balanced’ to ‘very close to balanced’ which would reflect Yellen’s recent communiqué. Recent turmoil in markets on the back of commodity prices and US HY could be a reason to keep the current language however. Of particular importance will be just how the FOMC chooses to address the gradualism of rate rises. This may not be explicitly addressed in the statement and instead driven home at the press conference. It’s likely that Yellen will point to her summary of economic projections and dot plots to help guide this. On the forecasts first of all, we don’t expect there to be much change to the FOMC’s median economic projections for real GDP growth, unemployment and inflation. Saying that, DB’s Peter Hooper believes that recent developments in markets mean the risk to a downward revision for core and headline PCE forecasts may have risen for this year and next. In the event of a downward revision in the inflation projection, a small downward revision to the median interest rate forecast path would be justified (i.e. reducing the number of increases in 2016 from four to three, and reducing the terminal rate. Peter points out that in his view even if inflation and growth forecasts are left unchanged, the dots could be moved lower for several reasons;
- The somewhat softer tenor of key inflation indicators, including inflation expectations, commodity prices, and the dollar.
- A case can be made for further reducing the estimated neutral level of the fed funds rate in the longer run.
- Likelihood of the Committee leadership wanting lift-off to be accompanied by a relatively dovish message about the ensuing path of rates and so narrowing the gap between market and Fed expectations a bit in the market’s direction would help with the digestion of liftoff.
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