Morgan Stanley on the Federal Open Market Committee due today (Wednesday 20 September 2017 US time)
Our US economists expect the Fed to announce balance sheet normalization at its September meeting. They also expect the median dots to remain as they were in June, with the Fed adding a final rate hike in 2020.
In our view, the risks to this outcome are that the 2018 median dot falls to 1.875% from 2.125% and the longer-run median dot falls to 2.75% from 3.00%.
MS assess the risks by creating "the following scenarios we felt were reasonable"
- We assume: 2 more FOMC participants pencil in no further hikes in 2017 and decrease the # of subsequent hikes in 2018 to 2 from 3;
- 2 participants keep the third hike in 2017, but decrease the # of subsequent hikes in 2018 to 2 from 3;
- and 2 participants decrease the # of hikes in 2017 to 3 from 4, but keep 4 hikes in 2018.
Given we assumed only 2 more participants join the "no more hikes in 2017" camp, the 2017 median dot remains at 1.375%. However, given our other assumptions, half of the Committee ends up with a 2018 dot below 2.00% and half ends up with a dot above 2.00% - leaving the median between 1.875 and 2.125% versus its 2.125% position in June.
It is possible that Randal Quarles is confirmed by the Senate and sworn in before the meeting, thereby allowing a 17th dot to be added. But, at this point, the Senate has not scheduled his confirmation hearing.
As a result of our scenario analysis, we think there is a reasonable risk that the 2018 median dot falls by 25bp, even though it's not our base case.
That's an interesting take from MS, and although their base case is for a 'same old' dot plot the risk is heightened for the USD in the scenario they outline as a risk.
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Ps. I am going to collate the FOMC previews ForexLive has posted separately.
