A piece from Bank of America Merrill Lynch on Monday (US time) with their outlook for the FOMC ... "June is a close call"
Our central scenario:
- June: the data are not quite strong enough to pull the trigger ... the Fed hints at a later date for changing the balance sheet policy
- September: the Fed hikes and offers more details on the reinvestment policy
- December: another hike and a formal plan for the balance sheet is released
And, into 2018 ...
- March: they announce the change to balance sheet policy in the statement, effective April
More:
- Fed officials have been preparing the market for a change to the balance sheet policy
- This is consistent with the Fed's larger communication strategy - slowly hint at policy changes and test the market reaction
- In our view, the Fed is still prioritizing interest rate normalization over the balance sheet
- We think that the Fed would like to bring rates to at least a range of 1.25 - 1.50% (two more hikes) before shrinking the balance sheet
- We believe it is a tall order for the Fed to deliver two more hikes and change the balance sheet policy before year end
- Leaving us to argue that balance sheet reduction is a story for early 2018
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The Federal Open Market Committee meet on May 2 - 3 and then on June 13 - 14
- The May meeting will not include a Summary of Economic Projections nor a press conference by the Chair
- The June meeting will include publishing the latest Summary of Economic Projections and a press conference by Chair Yellen
