FOMC may refocus attention back on gradual and shallow - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the September FOMC includes the two to three-year ahead projections and Chair Yellen press conference. 

Key Quotes

“In June , the central tendency (9 out of 17 members) was for two more hikes this year (although a significant number of 6 out of 17 members thought there would be only one hike), and no member thought there would be no hike.

If there is no hike next week, presumably most members will still project one hike this year.  It will be interesting to see if any Fed member goes for no hike this year.

In June, the mode (6 out of 17) was for four 25bp hikes in 2017, while the median was higher at six hikes.  After only hiking once so far in almost one year, the market will certainly doubt the Fed will hike once per quarter next year.  It is currently only pricing in one full hike over the next year.  An important issue for the market will be how rapidly the FOMC projects hikes next year.  It is easy to imagine that members revise down these projections.

And then, of course, the market will be equally interested in how the FOMC see the long-run neutral rate that was revised down again to 3% in June (from 4.25% in 2012).  There has been more discussion since mid-year about a lower neutral rate, and while this rate already seems low, some members have wondered if it could be even lower.  However, with a 2% inflation target, allowing something for a positive rate of real growth, it probably won’t be revised down again; this time at least.

There seems less scope for the statement, press conference and projections at this FOMC meeting to surprise to the down-side, judging by the less-dovish comments by most Fed members over the last month, but there is still some scope.

We presume that most Fed members will see the outlook as glass-half full, projecting several hikes next year.  However, the rate projections in 2017/18 still appear more likely to be revised down.  This might attract more attention to the gradual and shallow policy outlook of most Fed members that has received less attention in the market recently than the timing of the next rate hike.

On balance, we see the FOMC as unlikely to support the USD.”