FOMC: It’s all about the Fed’s projections rather than whether they raise rates or not - SocGen

According to the analysts at Societe Generale, this evening’s FOMC announcement (6pm GMT, with a press conference half an hour later) is all about the Fed’s projections rather than whether they raise rates or not.

Key Quotes

“Anything other than a 25bp rate hike would be a huge surprise to the market. Discounting that possibility on the grounds that the Fed is so (too) obsessed with managing market expectations ahead of policy moves, what we’ll watch are the ‘dots’ showing FOMC’s projections of where Fed Funds might go. Market pricing of Fed Funds through 2017- 19 is at the bottom of what the Fed currently projects. Our US economists think that the 2017/18 dots probably won’t move but beyond that, an upward adjustment is possible to send a signal to the market that the FOMC is serious about normalising policy.”

“That’s all well and good but after spending the 1980s defeating inflation, the Fed has allowed rates to spend progressively longer and longer below the nominal growth rate of the economy. Trend nominal growth is only a first estimate of where the natural rate of interest might be -and it’s definitely been dragged lower than that in recent years – but depressed market volatility, and the strength of asset prices are the result of low rates. And nominal GDP growth is at 3 ½%. At the last time of asking the FOMC’s range for the dots in 2019 was 3% wide, from 0.9% to 3.9% with a median at 2.9%. The more the back-end dots go up, the more the longer end of the Treasury market ought to re-price and the dollar ought to benefit. The less they re-price the dots, the more risk sentiment will be comforted by the Fed’s inability to change its spots. The happy medium, where dots rise but not too fast, is the world in which USD/JPY and AUD/JPY thrive.”