US September FOMC Preview: 12 major banks expectations

We are closing into the FOMC’s September policy meet decision and as the clocks tick closer to the decision timing, following are the expectations as forecasted by the economists and researchers of 12 major banks along with some thoughts on the future course of Fed’s action.

Most economists and analysts are divided about the chances of a rate hike today but majority of them expect the US Fed to hold fire till its December meet. Also, the post meeting statement, the economic projections and FOMC Chair Yellen’s Press Conference will be closely watched and the dot plot will hold important clues about when and how much the Fed will raise interest rates.

Deutsche Bank

DB doesn’t expect the Fed to move this month, a view also shared by the wider market however the key might be just how hawkish the hold can sound. DB’s Peter Hooper expects the statement of risks to be upgraded to ‘nearly balanced’ from ‘have diminished’ - which would be a strong signal ahead of December - and that Yellen should indicate that there was an active discussion of a rate hike this time, but that they decided to hold for now because of mixed signals in both growth and inflation. Yellen will also have to acknowledge that a rate hike by the end of the year is a reasonable expectation if data comes in consistent with the committee’s expectations, but she will probably also do her best to focus as little as possible on ‘December’ specifically. On that note, it’s likely that a substantial majority of the dots will likely shift down to one 25bp rate hike this year (in June a significant majority were projecting at least two hikes this year). What might be interesting is how many remain above one hike this year and how many expect no hike at all. Peter expects at least two in the former and zero to three in the latter.

RBS

The Outlook for Interest Rates Comments from Chair Yellen at Jackson Hole put the markets on alert for a possible rate hike in September. On balance, the recent data do not appear to meet the two criteria for further rate hikes laid out in the July FOMC minutes. Thus, we believe the Fed will wait for more information before concluding that a further rate hike is warranted. The most important part of the FOMC statement is likely to be the language surrounding "risks" to the outlook. In September, we expect the Fed will once again indicate that the risks to the outlook are "nearly balanced," which we believe would leave the door wide open for a rate hike later this year. Also, during her post-meeting press conference, we expect Yellen to reiterate that further action on rates may soon be appropriate (similar to her comments from Jackson Hole). In September, we expect a couple participants may have changed their mind but expect most to signal their preference for one (or more) rate hikes this year. That said, the median and trimmed mean estimates for 2016 and 2017 are likely to decline. Finally, we expect most participants will put their newly-added 2019 “dot” close to where they perceive the longer-run to be, as the argument for the funds rate to be below neutral three years from now is weak, in our view. At the same time, we do not think many participants will forecast a policy err that would be implied by putting their year-end 2019 "dot" above their longer-run estimate.

Rabobank

With the doves unconvinced, a September hike is unlikely. Hiking with one or more dissenters will be counterproductive: how can the FOMC convince the markets that a hike is justified when even in the Committee not everybody is convinced? More likely, the Fed will try to prepare the markets for a December hike by pointing at reduced downside risks from the global economy and markets, both in the formal statement and in the press conference. At present, the fed funds futures market has priced in only a 52.8% probability. With 9 dots for two hikes and 6 for one hike (and 2 for three to four hikes), a change in the median would take 3 participants changing their mind from two to one hike. In other words, only one in three ‘two hikes’ proponents changing their mind is sufficient to reduce the median to one hike. This appears to be the most likely outcome with only two meetings left after September.

Nomura

We do not expect the FOMC to change policy this week. FOMC participants continue to stress that their policy decisions are “data dependent.” We think the FOMC will need to see a more sustained acceleration of economic activity before raising rates again. That said, many FOMC participants, including Chair Yellen, have argued that “the case for an increase in the federal funds rate has strengthened in recent months.” Given these comments, we cannot rule out a rate increase this week. The FOMC forecasts for 2016 are likely to be changed somewhat to reflect the data that have been released since June. But beyond these basic changes, we do not expect major changes to the FOMC’s economic forecasts. We expect many FOMC participants to lower their forecasts for interest rates. A number of FOMC participants have said that they now expect interest rates to stay lower for longer. In effect, they have lowered their expected path for the “neutral” interest rate.

BNZ

The US OIS market still, bravely, prices just over a 20% chance of a Fed hike tonight (6am NZT). It prices 17bps of hikes by year-end. We would be staggered if the US Fed delivered a rate hike this week, though it may look to actively prepare the market for a December hike. A ‘no hike’ decision this week and some further nudging down of the Fed’s ‘dot point’ (as has become de rigueur) will likely be enough to keep a cap on US 10-year yields (in the absence of a surge higher in Japanese yields). We see continued resistance to US 10-year yields breaking above 1.75% in the near-term.

BNPP

Markets are pricing just a 20% chance of a rate hike. We think the likelihood of a hike are considerably higher and continue to forecast the Fed delivering 25bp of tightening. Our economists expect the Fed will cushion its delivery with reassurances about gradual tightening going forward, a lower projected terminal Fed funds rate and a shift to the dot plot to signal that further tightening this year is not expected. However, with rates markets under-priced for tightening heading into the meeting and the market short USD, we expect to see a significant, broad strengthening of the USD in response. If the Fed does elect to leave policy unchanged, we expect the accompanying message to attempt to keep a December hike in play, but markets are likely to be sceptical, and in this scenario the USD would likely challenge the lower ends of its recent ranges vs the EUR and JPY.

BBH

Most participants are convinced the Fed will not lift rates today, but will signal its intention to hike in December.  There is a meeting in November, but there is no precedent for changing policy so close to a national election. We think the Fed ought to raise interest rates today.  In one stroke it would recoup some of the credibility that critics say it has lost.  It would shift debate from over-promising and underdelivering to delivering a surprise.  We argue that the US economy is resilient enough to withstand a 25 bp rate hike.  In addition, contrary to some arguments that think the international climate is not supportive, we suspect that a Fed hike now would be welcomed by other central banks, whom many have exhausted the political willingness to ease monetary policy further.  In lieu of a rate hike, the dot plots and Yellen's press conference will be the focus.  Now, if it is going to maintain that every meeting is live, it must signal a single hike.  The news stream could be a bit more supportive. 

MUFG

Like the Fed itself perhaps, we admit we have flip-flopped a bit on our call on this, changing to a 25bp rate hike in our September Foreign Exchange Outlook. However, economic data since (in particular the non-Manufacturing ISM report) and the speech from Governor Brainard have made us doubt that call of a hike this evening. Indeed, if Yellen, Fischer and Dudley are united and want to hike this evening, they could probably muster a 7-2 majority with Brainard and Tarullo dissenting. However, with the probability of a rate hike so low, we fail to see the urgency in Yellen going in circumstances of causing a disruption to financial market conditions when we are now within two months of a presidential election. A 10% drop in asset prices would no doubt play into the hands of Donald Trump – so better to sit tight, stay out of the politics of the presidential race, give a message this evening of continued progress on achieving the dual mandate and wait until December. We also find it hard to envisage a “hawkish hold” this evening given the DOTS are likely to be cut for this year and next year and with the long-run fed funds rate probably coming down from 3.00%. Sure Yellen will signal a December rate hike with one DOT for 2016, but will the market believe it? We see downside risks for the dollar over the short-term.

TDS

The Fed is expected to keep its policy interest rate unchanged. The post-meeting statement will remain constructive and revert to a neutral assessment of the risks. The dot plot will solidify a hike by year-end and while the mean dots for 2017 and beyond are likely to shift lower, the number of hikes will remain unchanged. Only small revisions to the SEP expected. We expect the Fed to be close to market expectations with a slight dovish bias. We are long 10y Treasuries heading into the meeting and expect rates to decline modestly and the 5s-30s curve to steepen.

Danske Bank

The day has finally arrived for the Federal Reserve Open Market Committee (FOMC) to reconvene for its September meeting on monetary policy. The rate decision announcement is due at 20:00 CEST followed by a press conference at 20:30 CEST. We continue to believe the Federal Reserve will not raise the federal funds target range today or later this year. The recent string of weak US macroeconomic key figures supports this view. The markets have only priced in around a 10% probability of a hike in September and around a 50% probability of a hike in December. If rates are kept unchanged, the focus of the market is likely to turn swiftly to the projection for the federal funds rate.

ANZ

For the FOMC, expectations are that rates will be kept on hold. Whilst levels of resource utilisation in the labour market could justify a rate rise, headline inflation remains significantly below target and activity readings on the economy have been at best patchy recently. Central case expectations are that the dot points will be cut by 25bps and the FOMC will maintain its optionality by leaving one rate hike in for December. If the FOMC maintains its view of three hikes next year and in 2018 that would automatically lead to a reduction in the median estimates of fed funds for those years. Following the disappointing growth outturn in the first half of this year, there are downside risks to this year’s growth forecast (currently 2.0%). Forecasts for 2019 will also be published.

RBC CM

There is a widespread expectation that the outcome of today’s meeting will be a “hawkish hold”. We think the risk is the tone of the press conference and revised forecasts fall short of expectations. Our economists think the statement itself should prove to be relatively unremarkable, although a modest downward tilt to the characterisation of the economic backdrop is likely in the offing. They think the dots will shift lower, reflecting the removal of another hike this year, although the committee is likely to keep the “optionality” of a 2016 increase alive. Yellen’s press conference should lean on the dovish side given the recent bout of soft economic numbers.

Click here to read more about the FOMC preview from our in house Chief Analyst Valeria Bednarik titled “FOMC meeting: "hawkish hold"”