Wednesday, 01 August 2018 16:20

FOMC Preview: It Should Be Boring, But...

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Today at 2pm, the Fed will announce its rate decision.  No change in policy is expected and as a reminder this is a meeting that doesn’t have a press conference, nor a fresh summary of economic projections so the only focus will be on cosmetic changes to the statement.

  • Fed Funds futures show almost zero expectation for a move at this meeting versus a probability a little above 80%  in September.
  • Deutsche Bank economists expect a fairly uneventful statement with the only real change being an  acknowledgement of some recent softness in housing market data and/or trade tensions.
  • According to RanSquawk, there is a risk that the FOMC could issue a statement on the Fed’s independence, following the recent critique of high rates by US President Trump, which might be interpreted in a hawkish manner.

Some more details from RanSquawk on what to expect:


The Fed is very likely to stand pat on policy on Wednesday, maintaining the federal funds rate target at between  1.75-2.00%; money markets price just a 2.5% chance of a rate hike in August. There will be no post-meeting press  conference with Chair Powell, nor any updated economic projections, the focus will be on the FOMC's statement. June’s policy statement was tweaked heavily, and as a result, most analysts aren’t expecting to see any major tweaks in August. The statement, therefore, will likely endorse the current trajectory of gradual hikes, where the central bank expects to lift rates on a further two occasions in 2018, in line with money market pricing (around 95% chance, according to money markets).


The tone of economic data has been evolving in line with the Fed's forecasts; Core PCE stands at 2.0% Y/Y, in line with the Fed's forecast; the advanced Q2 GDP data showed growth of 4.1%, well ahead of the Fed's 2.8% forecast for 2018, though this bounce might be an aberration. Whether this will result in a change to the Fed’s language on incoming data remains to be seen. Societe Generale believes that the Fed will continue to describe growth as rising at a “solid” rate. SocGen also argues that the Fed may adjust its language on the unemployment rate, arguing that since the June jobless rate rose from 3.8% to 4.0%, the statement will need to drop the reference to how the rate ‘declined’, which could see a return of the older language that states the unemployment rate “has stayed low.” Some have also been focussing on June's removal of the reference to the FFR target being below the longer-run neutral rate, but the general view is the Fed is unlikely to tweak its forward guidance about policy accommodation.


While the Fed's "dots" define the neutral funds rate at 2.9%, there’s uncertainty around that projection, and the Fed’s monetary policy report in July includes estimates that would...

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