FOMC: With Today’s Hike Priced-In, This Meeting is About the Balance Sheet


The following are brief expectations for the outcome as well as the strategies for trading as compiled from the related research reports of 15 major banks.

TD Research: We think the market is underestimating a hawkish hike from the Fed. This is because the median dot-plot should remain unchanged to confirm 3 total hikes this year. Further, we think this week, the risk of an acute discussion of balance sheet normalization could surface. The combination of both should compel a hawkish re-pricing in the Fed outlook.

Credit Suisse Research: With the market 90 don’t expect much USD upside from such an outcome alone. Rather, we’d need to see forecast changes, a statement or a Q&A with Fed chief Yellen that allows room for the market to fully price in another hike for 2017 H2.

The risk is that the Fed could hint at an earlier balance sheet exit than the market is currently expecting. Coupled with an unchanged dot plot this could be enough for the US yields and the USD to move higher after the Fed.

More important for US dollar performance will be the Fed’s updated signal over the pace of future tightening. At the current juncture, we believe that the Fed will stick to its plans from March to raise rates one more time later this year and to deliver a further three hikes in 2018 and 2019 as they move towards their longer-run estimate of 3.00%.

SocGen Research: The FOMC’s response is likely to be a “dovish hike” and that’s priced in, to a big degree. Uncertain about just how much slack there is in the economy or the labor market, FOCM members are inclined to want to “normalize” rates while they have the chance, but they seem very pragmatic about the longer-term outlook. That could leave yields in their own range, the hunt for carrying intact. Obviously, since this is to some degree precisely what the market expects, the converse is also true ” a “hawkish hike” would come as a big surprise and unsettle higher-yielding currencies

SEB Research: We expect the FOMC to boost the target range for the Fed funds rate to 1.00-1.25%. A failure to hike would be a major surprise to markets, something the Fed is anxious to avoid. Our current forecast is that the hike next week will be followed by a hike in September. However, unless inflation starts to accelerate in coming months or wage growth takes off sharply, we’ll push back our expectations for a September hike to December.

Barclays Research: we expect the Fed to increase the target range for the federal funds’ rate 25bp. The June hike is almost fully priced in and is unlikely to bring much potential upside that is USD even though, the path might be sensitive to any Fed guidance on future action, and priced for future hikes is benign. In that sense, the discussion surrounding balance and also the staff projections sheet normalization will be the focus. Our US economists expect the Fed to revise two-tenths 2017 activity softness fading in 2018 and downward the inflation projection for 2017, offset by a lower expected path for the unemployment rate. We expect no change in the median dot-plot for 2017 and 2018.

RBC Research: That the Fed will increase the fund’s rate by 25bps to a range of 1.001.25% is baked-in-the-cake and fully discounted by markets. More important is Fed Yellen’s conference, where we should get a little more detail on balance sheet run-off. We may get more on the likely evolution of these, although it is probably too early to get the initial sizes of the caps. Our economists view the caps as a flexible tapering. Tapering would have been very hard to adjust while caps may be far more data, once it was announced -dependent.

Deutsche Bank Research: DB economists expect a rate hike (as do the consensus) and that the Fed should signal that an announcement about beginning to phase out balance sheet reinvestment is likely in the coming meetings in the event the economy remains on track. But with both of these factors well anticipated by the market, the key question for the meeting will be whether they’ll pause when announcing the change in their balance sheet policy and whether the Fed provides any additional guidance about when the next rate hike is expected.

Morgan Stanley Research: We expect the Fed to raise rates at this meeting, and update its exit strategy concerning the balance sheet. Beyond June, the Fed is mindful of weak inflation data’making a September hike a hard sell, and we agree. We expect the Fed to pause on hiking in September to begin balance sheet drawdown.

Danske Research: We see the Fed skipping hiking at today’s meeting and instead of announcing the triggers for quantitative tightening (QT). Should the Fed refrain from hiking in June, the knee-jerk reaction will most likely be to send EUR/USD higher, but we don’t expect a move much above the 1.13 level. However, in our base case that a summer hike will come ” if not June, then July ” we think that as markets digest the boldness with which we think the FOMC will move near term, USD strength will materialize for a while.

If no upsets here, then what if anything happens to the 2018 dots along with the narrative surrounding them in Yellen’s post-FOMC press conference, should be important.

BofAML Research: We expect the FOMC to raise rates at the 13 14 June meeting but thinks the messaging will have dovish undertones. We expect no change in the median dot. We think some officials will lower theirs, offsetting the removal of Tarullo’s dot. We do not expect the decision to affect the USD, as the market has priced a June hike.

Lloyds Research: Our economists see no change to their median forecast for one further hike this year, three in 2018 and then achieve a longer-run Fed funds rate of 3%. If that’s the case, it should lead US yields to remain in the USD and also their ranges to remain on the back-foot. The surprise is a more hawkish outlook, or they leave rates unchanged.