Its FOMC week - preview (spoiler - normalisation start is a yawn, dots more interesting)

Author: Eamonn Sheridan | Category: Central Banks

The Federal Open Market Committee meet on Tuesday and Wednesday this week, September 19 and 20

  • The Committee will issue an updated Summary of Economic Projections
  • Following the Statement there will be a press conference by the Chair, Janet Yellen
Via HSBC, a preview of what to expect (summary - from a long and detailed HSBC piece indeed - and bolding is mine):

We expect the FOMC to announce the commencement of balance sheet contraction
  • For several months now, the FOMC has been preparing financial markets for the advent of quantitative tightening.
  • Fed officials have not used that term; they prefer "policy normalization" to describe the planned process of reducing the size of the Fed's balance sheet. But just as the expansion of the Fed's balance sheet through quantitative easing provided some monetary policy accommodation to the economy, shrinking the Fed's balance sheet should be regarded as a step in the direction of tighter monetary conditions.
Fed officials have thoroughly prepared financial markets for this event; we anticipate little market reaction
  • In June, the FOMC announced that it intended to start reducing the size of the Fed's balance sheet sometime "this year," by gradually decreasing its reinvestment of principal payments received from its holdings of Treasury securities and agency MBS.
  • We expect the FOMC will announce that balance sheet reduction will start in October.
The latest Summary of Economic Projections, including projections for future rate hikes, may attract more attention
  • We expect that the median projection for 2017 will still be for one more 25bp rate hike in December
  • The median projection is for an additional three 25bp rate hikes in 2018 and again in 2019
  • In light of recent low inflation readings, some of the policymakers could lower their funds rate projections modestly for 2017 through 2019. This could create the impression of a "dovish" change in the outlook for longer-run policy tightening.
  • Although some dots could move lower, we do not expect the median projection for 2017 or 2018 will change. There is the possibility that the median projection for 2019 will come down.
And, finally, HSBC's forecast for the path for rate hikes:
  • Our forecasts are for one more 25bp hike in 2017
  • and one 25bp rise in 2018, already well-below the pace indicated by the FOMC's current projections.
Yesterday I posted an earlier FOMC preview:

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