Expectations for today’s FOMC June policy meeting –

The following are the expectations for today’s FOMC June policy meeting as provided by the economists at 22 major banks along with some thoughts on the USD into the event as provided by the FX strategists at these banks.

Goldman: The overarching message from the meeting will probably be that September remains the Committee’s baseline expectation for the start of monetary tightening, reflecting cumulative progress in the recovery over the last six years. While September remains our baseline as well, we think that the FOMC will want to preserve optionality at the June meeting, and there is still a significant probability that the hiking cycle will not begin until December or later. We expect the content of the Summary of Economic Projections (SEP)—released coincident with the FOMC statement—to be updated to reflect the recent economic data. The unemployment rate path will likely be slightly higher in the near term, while long-term views on the natural rate of unemployment may come down further. Participants’ assessment of the inflation outlook will probably be little changed. Most importantly, we think that both the median and modal “dot” will remain at 0.625% for 2015, consistent with two twenty five basis point hikes this year (beginning in September). However, most other aspects of the dot plot will probably show a dovish shift, reflecting softer H1 activity and the Fed’s “data dependent” mantra.

Barclays: Markets will pay close attention to the tone of the FOMC statement on Wednesday and watch for hints on the timing of the first rate hike. Given the recent pickup in US consumption and labor market data, we think the Fed is likely to maintain its view that the winter slowdown was transitory and that the economy is likely to expand at a moderate pace. Indeed, the pace of job growth has picked up, with payrolls rising 280K in May, and the Fed’s LMCI has increased since the April meeting. Additionally, we expect the Fed to reiterate that inflation will gradually rise toward the 2% target in the medium term as the labor market continues to improve and inflation expectations remain stable. Indeed, CPI data on Thursday, along with the latest import price data, should support our view that downward pressures on domestic core inflation from the lagged effects of USD appreciation will begin to wane going into the third quarter. As such, we continue to think the Fed is on track to hike twice this year (at the September and December meetings). Overall, we believe that the FOMC statements, along with CPI and other macro data, should support the USD

UBS: We expect Chair Yellen to continue setting the stage for the start of the Fed’s tightening cycle later this year. If market expectations are correct, the June FOMC meeting will be the last quarterly update to the FOMC’s forecasts before the Fed at the September 16-17 FOMC meeting hikes rates for the first time in more than nine years. (The previous rate hike was on June 29, 2006.) As a consequence market participants are focused on the upcoming meeting despite no expectation that the Fed funds target rate will be immediately increased. We do not expect the post-meeting statement, the forecast or the press conference to prompt a rethinking of current market expectations. As of Friday the markets were pricing in a bit more than 75% chance of a rate hike at the September FOMC meeting. We believe the FOMC is currently comfortable with that view and is cognizant of the fact that there are ample opportunities to reset market expectations, if needed, before the September meeting.

Deutsche Bank: The statement should have a more positive tone, especially regarding the labor market. Our forecasts of the Fed’s central tendencies are shown in the table below. Despite a reduction in 2015 GDP, we do not believe the median 2015 fed funds dot will change. Any reduction in the median 2015 dot would immediately focus market participants’ collective attention on the December meeting, and the Fed surely wants the option to hike in September, data permitting…Regarding the press conference, Yellen will reaffirm the case for beginning the process of policy normalization sometime later this year. The Fed Chair’s May 22 speech was telling in that she subtly shifted the conversation from outlining why the Fed may begin raising interest rates to how far and how fast they may go after liftoff. She may choose to elaborate on some of the themes of that speech, including productivity growth. In short, we expect the Fed Chair to continue to de-emphasize the timing of liftoff and focus financial market participants on the factors the Fed will be taking into account in determining the pace of policy normalization.

BNP Paribas: We expect today’s FOMC statement to acknowledge improvement in key data after transitory factors suppressing Q1 activity abated. In the subsequent press conference, Chair Yellen will likely continue to emphasize that rate hikes are likely coming at some point later this year. However, the meeting may not provide a decisive catalyst for the US currency. Our economists note that the FOMC’s projection ‘dots’ are likely to shift in a dovish direction as the more hawkish members acknowledge that tightening will not begin in mid-2015. The Committee and Chair Yellen will also need to explain its decision to leave rates unchanged now and be sure to avoid signalling lift off at the July meeting. Rate markets remain underpriced relative to our expectation for tightening to begin in September but we may need to wait for more economic data and subsequent Fed communications before we see an adjustment to our view

Credit Suisse: We expect the FOMC to acknowledge the improvement in US economic statistics since the reported contraction in 1Q. But the rebound in activity is still building momentum and has not been sufficiently conclusive, in our view, to prompt the Fed to tighten policy as soon as this month. Also, while we do assign a small positive probability to a July rate hike, say 15%, we believe September to be the most likely date for policy lift-off. Various scenarios related to the June 16–17 meeting include the possibility of more explicit guidance in the policy statement on the timing of a rate hike (not likely in our view) and downward revisions to GDP growth forecasts.

Nomura: The FOMC is likely to clearly keep September lift-off on the table when it meets this week. After better data momentum, the text of the statement is likely to sound more confident, and the dots are likely to signal that a two-hike scenario in 2015 is still the central case. While one hike has again become the central case, a two-hike scenario is still priced with a fairly low probability. We think the two-hike scenario is around 60% probability, and if this is true, the short end has more room to sell off.

SocGen: The risk at this evening’s FOMC meeting is, that while the underlying economic vies are reasonably upbeat and consistent with ‘lift-off’ happening in September, the (in)famous ‘dot-path’ will be lowered enough to be the main talking point. The FOMC ‘dots’ project 2 rate hikes this year and 5 next, so a total of 1.75% in hikes by the end of 2016. The Fed Funds futures price a 1% rise in rates over the same period, and our economics team expects the dot-plot to be cut back to 125bp. Is the market going to see this as a non-event, affirmation that too little is priced in, or a dovish signal? I rather fear the last of these may win the day but all will be clearer at 19:00 BST or, more likely after 19:30 when the press conference allows Janet Yellen to send the signal she wants. Either way, the bigger move is more likely to come in July/August as data convince people that a hike is coming

Credit Agricole: We expect no changes to rates at the June FOMC meeting and continue to expect rate normalization to begin in September. No rate hikes are expected as policymakers continue to assess progress towards conditions conducive for lift-off. These include (1) continued improvement in labour market conditions and (2) reasonable confidence that inflation will move back to its 2% objective over the medium term. We believe the Fed is close to meeting its employment mandate. However, the Fed is likely to require more evidence before being reasonably confident that inflation will rise towards its 2% objective over the medium term. Assessing the transitory impacts on growth and the economy’s underlying momentum will require more time. However, we believe that the FOMC will see evidence that the conditions for lift-off have been met by the September FOMC meeting. The updated Summary of Economic Projections (SEP) will likely lower GDP growth projections for 2015 in light of the Q1 GDP contraction. We believe most Fed officials expect to begin hiking rates this year. The year-end 2016 median fed funds rate projection may come in slightly below the March projection, in line with the gradual pace of anticipated rate normalisation.

ANZ: Market focus will turn to the FOMC meeting this week and there are three areas to watch for the USD. The first is any commentary on the USD – there has been an increase in official rhetoric about the strength of the USD negatively impacting on the US of late, and this is important for the medium-term USD path. The second is economic growth projections. The market and ANZ expects the Q1 GDP weakness to lead to official 2015 growth forecasts revised lower. The final area to focus on is the ‘dot points’.

RBS: The key hawkish risk at this week’s June FOMC meeting may come from the signaling language. The April meeting minutes revealed that the Fed discussed (and opted not to) give a broader signal that rate hikes were coming soon – any direct step to “prepare” the market for a rate hike via the press conference or statement language would likely be a USD positive. With only 6-months to go before year-end, the market may put focus on the near-term FOMC “dot” projections released this week, where the median currently suggests the Fed can hike twice before year-end. No change in the dot point projections for 2015 could be seen as a positive as only one hike is priced in for the remainder of the year. The well-telegraphed sluggish start to the economy may result in a downward revision to 2015 growth forecasts, and that may leave risks to the “dot point” Fed Funds rate projections as moderately to the downside. Even so, we think the Fed sending a message about increased confidence in their positive outlook may overshadow a revised growth profile.

Lloyds: While a hike in interest rates at today’s FOMC meeting looks highly unlikely, the meeting could still provide clues about the timing of a first move. An important indication of the likelihood of a relatively early rise in rates will be the extent to which the post-meeting statement is more upbeat about recent economic developments compared to the last meeting in April. Markets will also look for hints from Chair Yellen’s post-meeting press conference for the timing of lift-off. However, the Committee will probably be reluctant to add anything to previous comments that any move will be “data dependent”. Finally, the updates to FOMC participants’ interest rate forecasts (the ‘dot plot’) will show whether most still expect interest rates to rise this year, and their expected path over both the short and longer term.

Standard Chartered: Buoyed by improving data (including May payrolls and retail sales data), and by tentative signs of a pick­up in wages, we think the Fed will indicate that the first rate hike is getting closer, supporting our long­held view that the Fed will move in September. We see some pushback on the IMF’s suggestion to wait until 2016 due to risks of increased volatility “in the US and abroad”. This said, we think Yellen will emphasise that the subsequent tightening path will remain very gradual, highlighting that the first steps represent removal of excessive accommodation, not tightening of policy. This is likely to be echoed by falling ‘dots’, which may move closer to (but still not match) the current market pricing, particularly further down the curve. We see the ‘terminal rate’ median moving down by c.25bps as the Fed reduces its assessment of potential growth and productivity. We think the overall tone of the statement and Yellen’s comments will cause the short end to bring forward its rate­hike expectations. Indeed, we expect the median end­2015 ‘dots’ to remain at 0.625%, implying two hikes by year­end. However, the further decline in the longer­term median ‘dots’ that we expect, along with another decline in the Fed’s projection for potential growth, should keep the 10Y sector relatively protected.

Westpac: We expect the FOMC to reinforce our expectation of a Sep funds rate hike (from 0-0.25% to 0.25-0.5%), though of course Chair Yellen should stress ongoing data dependence. The release of quarterly forecasts by FOMC members plus the Yellen press conference 30 minutes later means markets will have plenty to absorb, with volatile trade likely. Given the dismal Q1 GDP report, forecasts for 2015 should be cut notably, with 2016 expectations probably lowered too. Inflation forecasts could also be nudged a little lower.
However, the general tone of the statement and Yellen’s press conference should be positive, with evidence on jobs, retail sales and housing pointing to a rebound in growth in Q2, setting up for solid expansion in H2. The “dot plot” of expectations for the funds rate by end-2015 should consolidate around 50bp of tightening this year, more than priced in. Combined with the press conference, this should see USD emerge firmer from the meeting.

Citi: FOMC unlikely to support USD or rates this time around. The market pivots for FOMC are: 1) How on track the Fed sees the US economy for liftoff and how concretely they signal a September liftoff 2) The 2015 dots are likely to show a big shift down – their problem is that it is difficult to convey neutral, which is 1 hike likely, 2 possible, but no commitment unless data turn out right. We go into this seeing the Fed as leaning to dovish, and hence somewhat USD negative. They do have not much incentive to sound concrete about a September hike this far in advance and would not want asset market reaction in advance of an anticipated September hike to derail an actual September hike. Both their commentary and the dots shifts are likely to be less committal to a hike than the market now expects.

ING: We see this week’s June FOMC as crucial in shifting the focus for markets back to short-term US rates and the theme of monetary policy divergence. Market pricing for the timing of a Fed lift-off has been moving in the right direction, with the probability of a 25bp rate hike in September increasing from 35% to 55% following the robust NFP and retail sales prints. The anomaly of EUR/USD moving higher last week may insinuate pent-up USD strength and we see scope for a sharp move lower once the pair’s relationship with short-term rates normalises.

SEB: We do not expect a rate hike at this meeting. No major changes to June statement are excepted although the fact on recent pick up in data should be noted. The Fed’s new forecasts will also be key focus. The downward revision to its growth outlook will suggest that the pace of rate hikes to be more gradual. In the press conference the market will look for if Yellen’s comments carefully paves the way for a September rate hike. Moreover, what is her take on the international developments (for example the situation in Greece)?

Danske: The updated ‘dots’ will attract a lot of attention and we believe that several members have lowered their expected path for the Fed funds rate. In terms of the statement we expect the tone to be slightly more upbeat than in April given the latest more positive run of US data but we do not expect any major changes in the forward-looking part of the statement. At the following press conference key will be the FOMC view on how much of the Q1 economic weakness is likely to be temporary and how this, combined with the most recent more positive data, has affected its economic outlook.

BTMU: The overall message from Fed Chair Yellen is likely to be that the Fed remains on course to begin raising rates later this year if the economy performs as expected, although the exact timing of the first rate hike is likely to remain unclear. She is also likely to reinforce the message that the expected pace of tightening is expected to be gradual. For the interest rate market the message from the Fed is unlikely to be a big surprise which is already discounting a more dovish outlook for Fed policy. The updated Fed projections will merely move their thinking further into line with the interest rate market. The US dollar may weaken modestly initially if the Fed funds rate and growth projections are lowered. However, the US dollar already appears to trading on the weaker side of yield spreads heading into the FOMC meeting which should help limit further downside potential. Incoming economic data will remain important in determining the outlook for Fed policy and US dollar direction. If the recent improving momentum in the US economy and strengthening wage growth is sustained it is likely to make the Fed more comfortable about raising rates which may still be delivered as early September. In these circumstances, we expect that any US dollar weakness following the FOMC meeting will likely prove short-lived.

CIBC: The Fed will likely sound more confident that the first quarter slowdown was indeed “transitory”, although the updated “dot plot” projections for interest rates have a greater chance of moving markets if they differ materially from March.

BofA Merrill: This week’s FOMC meeting will be pivotal, but not because a rate hike is likely. Indeed, the rates market sees a near-zero probability of a hike in June, despite Friday’s strong employment report (Chart of the day). The July meeting is expected to be a non-event as well, with just 2.5bp of slope priced into the inter-meeting forward OIS curve. Unsurprisingly, the market is treating September as the first truly “live” meeting. Market-implied odds of a September liftoff have increased somewhat over the past few weeks as data have improved, but with 10bp currently priced in, the market remains unconvinced a September hike is likely. This likely reflects lingering uncertainty about the prospects for a growth rebound after a disappointing start to the year. However, our 2Q GDP tracking model now stands at 2.9%, as Ethan Harris notes in his latest Ethanomics. With growth picking up, September remains our base case for the first Fed hike, a view that was affirmed by the latest employment report. In light of this, we reiterate our Aug-Oct 2015 forward OIS curve steepener recommendation (11 bp), which we continue to see as a cheap way to position for a September rate hike.

NAB: the Fed will release its new set of growth, inflation and unemployment forecasts and its “dot point” FOMC member forecasts for the Fed funds rate. No one expects any change in the Fed funds rate, though markets remain priced toward Fed rate lift-off later this year. NAB’s core view remains for Fed Funds rate lift-off will be announced at the 18 September FOMC, with clearer evidence of returning US economic growth and thus confidence in the Fed reaching its 2% PCE inflation target. The FX and bond market will be paying close attention to the Fed Policy Statement, to what Fed Chair Yellen has to say in her press conference, and new US economy forecasts, with particular forecasts on those dot point estimates of the Fed funds rate for the end of 2015, 2016 and 2017. The previous median of the dot points at the March 18 FOMC (its most recent set of forecasts) had a median Fed funds forecast of 50-75 bps for the end of 2015 and 1.75-2% for the end of 2016. The US market at the end of last week was 53% priced for a September 18 lift-off. If the Fed hangs tough and hold to its median Fed Funds forecast for end 2015, that would be supportive of short-term US yields and we expect the USD.

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