US December FOMC Preview: 10 major banks expectations

We are closing into the FOMC’s December 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 10 major banks along with some thoughts on the future course of Fed’s action.

Most economists and analysts expect the FOMC will raise the federal funds rate target to 0.50-0.75% at the conclusion of the today’s meeting as the incoming data since the last meeting has been sufficiently positive for the Committee to conclude that the case for rate hike has been finally met.  In addition, most of the banks expect that the Committee will not adjust the path of rates materially as the Committee and Chair Yellen are likely to be cautious,  while emphasizing data dependency and reserving judgement on the impact of coming fiscal measures until more details and certainty are available next year

Goldman Sachs

In line with market pricing, we expect the FOMC to raise the federal funds rate by 25bp. That said, we also think that Chair Yellen will continue to emphasize that monetary policy is not on a pre-set course and that the data will dictate the future path of interest rates. Guidance from the meeting, the Summary of Economic Projections, and Chair Yellen’s testimony are likely to repeat the committee’s existing view that the pace of rate hikes will be gradual. In the Summary of Economic Projections (SEP), we look for: (1) modest upward revisions to GDP growth and lower unemployment rate projections for 2016 and 2017; (2) a one-tenth increase in core PCE for 2016 and 2017; and (3) unchanged median fed funds rate projections for 2017 and beyond.

Nomura

In line with market expectations, we expect the FOMC will raise the federal funds rate target to 0.50-0.75% at the conclusion of the 13-14 December meeting. We think that the incoming data since the last meeting has been sufficiently positive for the Committee to conclude that the case for rate hike has been finally met. On the policy statement, we expect the paragraph on current economic conditions to point to continued growth. Additionally, we expect the Committee to highlight two notable developments – a sharp drop in the unemployment rate and a pickup in market-based measures of inflation compensation – in the statement. On the economic outlook, we expect no substantive changes, although the Committee may acknowledge a shift in the balance of risks to the positive side given the potential fiscal stimulus that will likely be realized under a Republican-led Congress and a Trump White House. 

In addition, we will receive a new set of forecasts from the FOMC participants. We think that the median growth forecast in 2016 will be revised up and the median unemployment rate will be revised down. On inflation, given the recent moves in energy prices, we think PCE headline inflation forecast for 2016 will be revised up slightly higher but we think that the core inflation forecast will remain unchanged. Our base scenario is that FOMC participants will not change their outlook for 2017 and beyond as we do not think the Committee will incorporate the possibility of fiscal expansion. On the dots, as the data have come in broadly in line with market expectations, we do not think that the Committee will adjust the path of rates materially. Last, Chair Yellen will hold a press conference after the conclusion of the two-day policy meeting. We will likely hear the reasons that led the Committee to raise rates. We will also listen for any clues on how the FOMC may change its outlook in response to the major fiscal stimulus that will likely be enacted next year. 

BNPP

We expect a 25bp increase in the Fed funds target range to 0.50-0.75%. The elephant in the press conference room will be how the Fed will respond to changes in the fiscal outlook and its effects on the economy, which remain highly uncertain. We expect a lot of talk about data dependence and maybe some discussion of scenarios, but little new guidance beyond what is already in the Fed’s projections. Fed Chair Yellen will be pressed by the media, however, and it will be difficult for her not to say that easier fiscal conditions mean tighter monetary ones. 

Natixis

Fed is widely expected to hike the Fed funds rate by 25bps (to 0.50%-0.75%) at the FOMC meeting. In the statement, the Fed should confirm the recent strengthening in economic activity and the improvement on the labor market (decline in unemployment rate) while continuing to emphasize its cautious approach regarding the tightening cycle. In the summary of economic projections (SEP), the Fed is likely to revise the 2016 growth forecasts downward from the September level. Growth forecasts for coming years could be revised downward as well (with stronger USD and rising oil) if no fiscal stimulus is considered. PCE inflation forecasts for 2017 and 2018 may be revised slightly higher. Moreover, we expect that the downward adjustment of the “dots” should have come to an end and that only slight changes will be seen this time. Finally, Chair J. Yellen’s press conference will be closely watched as she lays out her view of the short run monetary policy prospect.

TDS

We expect the Fed to raise the fed funds range by 25bps in December, as near universally anticipated. The Fed is likely to be prudent in its messaging with the aim to allow markets a chance to digest and reassess expectations rather than add fuel to the fire. We expect the meeting to underscore the Fed's patient stance beyond December, evinced in the statement, little change to economic projections and an unchanged pace of normalization in the dot plot. The press conference will draw attention for any flags of a more hawkish stance in anticipation of fiscal stimulus, which we think Yellen will be careful to avoid. Instead, we expect the Chair to reinforce a patient stance in highlighting the scope for further reduction in labor market slack and the downside risks associated with USD strengthening.

BBH

A 25 bp increase is so widely expected that the failure to deliver it would be more destabilizing than a hike.  The aspirational policy of the new US Administration is not the basis on which monetary policy can be formed.  It may disappoint some participants if the FOMC's economic projections are little changed from September.  Many hope that the outlook for fiscal policy will be clearer by the March meeting when the forecasts are updated, but that may be too optimistic.  The market will likely take its cues from the dot plot rather than the statement.  The press conference will also be important because it is there that Yellen will be pressed about how the Fed thinks about fiscal policy.  We expect Yellen to deftly deflect concerns about the Fed's independence.  

Danske Bank

In line with consensus, we expect the Fed to raise the Fed funds target range 25bp to 0.50%-0.75% from the current 0.25%-0.50% at the FOMC meeting, as economic data have improved, the labour market is tightening and financial markets are calm. Markets have fully priced in such a rise. We expect the median ‘dots’ to stay unchanged, signalling two hikes in 2017 and three in 2018, as many FOMC members have said that they want to analyse Trump’s actual economic plans before taking action. Also we think the FOMC members will be reluctant to raise the ‘dots’ prematurely, as they had to revise them down several times this year. For the same reason, we do not expect major changes to the growth, core inflation or unemployment forecasts (the markets also tend to focus less on them). We see a chance that the longer-run median ‘dot’ will be revised down to 2.75% from 2.88% currently, as it needs only one FOMC member currently indicating an end rate of 3.00% to revise it down for the longer-run median ‘dot’ to be revised down as well.

Westpac

The main focus will remain the outcome of the FOMC. Its importance is not so much the decision to deliver a 25bp rate hike - that result has been fully factored-in for some time - but for the message sent to the market via the "Dot Plot" and Chair Yellen's subsequent press conference. We suspect that the Fed will continue with its long-held messaging of a gradual approach to further tightenings. As such they will aim to avoid market speculation of a faster pace of rate hikes and an underwriting of even higher long-end UST yields. Indeed, there has already been a tightening of financial conditions via recent yield rises and a surging USD. That should motivate the Fed to adopt a cautious approach to its messaging.

Rabobank

The FOMC will raise its target range for the federal funds rate to 0.50-0.75%. It remains to be seen whether the decision to hike will be unanimous. The previous dot plot, published in September, implied two rate hikes in 2017. Since then, economic data have evolved in line with the Fed’s expectations, so that should not be a reason for a major shift in the dot plot. While Fed speakers have been careful in their comments on the election outcome, the dot plot will reveal what they really think about the economic consequences.

MUFG

The final global macro event of a year that will be remembered for obvious reasons is upon us with the final FOMC monetary decision to be announced at 1900 GMT this evening suggests Derek Halpenny, European Head of GMR at MUFG. We expect only very modest alterations to the economic projections while we also expect the DOTS profile on fed funds rate increases to reveal the same median for 2017 as in September – that is two rate increases to a median level of 1.13% at the end of next year. Where there are forecast tweaks we do expect them to be upward in terms of real GDP and inflation and downward in terms of the unemployment rate.

Click here to read more about the FOMC preview from our in house Chief Analyst Valeria Bednarik titled “FOMC meeting: looking beyond a rate hike”

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