TheChek News Flow

FOMC Street Views:

* Barc: Patient removed. See risks are skewed towards the Fed’s revising its growth forecasts lower. Look for potential downward revision to inflation and growth forecasts. They expect lower inflation to likely to weigh on the expected path of the hiking cycle, even as the phrase “patient” is removed. They highlight this was the case between Sept/Dec ’14 as inflation f/cs weakened, despite lower u/e f/cs. In addition, look for Yellen is to emphasize that while the trajectory of the hiking cycle is data dependent, it should be very gradual, given the subdued inflation outlook and sluggish wage growth.

* CS: Expect next week's FOMC to see the "patient" wording removed. They note the dots are the obvious measure that has long been in focus, but the market continues to doubt the dots. Even the dots imply (by their calculations) only two hikes this year. The market remains unwilling to believe that the six hikes in 2016 that the dots currently imply can be realized. They are of the opinion that a few more strong data prints will help to reprice the market’s expectations for Fed action.

* DB: Looks for Fed to alter its forward guidance language to allow the Committee the flexibility to raise interest rates sometime around the middle of this year, possibly in June. This could mean removing "patient" from the meeting statement. Projections should indicate a more confident outlook for the labor market, although this will likely coincide with more tepid near-term inflation forecasts. GS: Fed to recognize the improvement in labour market conditions. Look for Fed to drop patience, replace with language suggesting increase in rates could be warranted if the committee is “reasonably confident” that inflation will move back over the medium term towards 2%. They recognize that a June hike is in play, but not a foregone conclusion. In SEPs; look for growth to be revised lower, inflation will be marked down substantially for 2015 & slightly for 2016, dots to come lower for end-of 2015 to 50-75bp range.

 

* HSBC: Fed drops "patient" reference. Future guidance on possible changes in the federal funds rate is now likely to focus on the state of the economy. They suggest the Committee may look to emphasize that it wants to be "reasonably confident" that inflation will return to 2% before it commences policy normalization. Some of the projections for the appropriate federal funds rate (in the "dot" diagram) might be lowered for 2015, given the reaction to the recent decline in inflation. They expect the Committee to wait until September before taking action.

* JPM: Fed drop "patient" replace it with more data-dependent guidance, stating need "reasonable confidence" in inflation returning to 2% before liftoff. Look for eco f/cs to be projected modestly lower; GDP, inflation, and unemployment, relative to the December f/c. Anticipate the "dots" to be revised somewhat lower as well, particularly for 2015. Yellen's will emphasize; (1) dropping "patient" means June is the earliest lift-off under consideration but that it could come later, and (2) the pace of rate hikes is more consequential than the exact timing of liftoff & it won't necessarily be "measured"—as per the 2004-2006 cycle—but could instead feature pauses between hikes, as conditions dictate.

* MS: Expect “patient” to be dropped. Committee may add that it will look to normalize policy once it feels “reasonably confident” it is appropriate to do so. Committee to remain concerned about international developments given the unrelenting ascent of the US dollar and its implications for growth, inflation, and financial conditions. Expect downward revisions to inflation – both headline and core – as well as the longer-run unemployment. Look for little change to the outlook for growth.

* Soc Gen: Fed to drop the word “patient” in the upcoming FOMC meeting next week but simultaneously lower its near-term forecasts for rates. Their economists expect the Fed to hike rates in June and only one more rate hike by year-end. In terms of market pricing vs. dots, they look for one-third of the gap to be closed by revisions to the FOMC “dots” and the remaining two-thirds by the market. See end of 2015