What to expect from today's FOMC decision
It's Fed day and at 1800 GMT (2 pm ET) we get the statement and an updated round of economic projections.
In terms of actions, expectations are very low. This is a wait-and-see meeting as the Fed continues to monitor the pandemic and economy. There is an outside chance of more QE or more-aggressive forward guidance.
There isn't much more the Fed can do besides signaling rates lower for longer but even on that front there has to be a limit.
Average inflation targeting is an interesting topic but it's not a factor in the near-term with inflation well-below target. I struggle to believe that signals about 2023 and beyond will be lasting market movers.
"Fed speakers downplaying implementation of outcome based guidance at this meeting means it's hard to see where the bullish surprise comes from for the USD at tomorrow's FOMC and as such it does feel like the risk reward is asymmetrically skewed towards a lower USD," according to JPMorgan's FX desk.
In the statement, expect language to indicate improvement but that it will include a nod to 'considerable risks.' If it's removed, it would hurt risk trades and boost the US dollar.
The main intrigue is in the dots and the forecasts. This is the first look at 2023 economic forecasts. Where will the 2023 dots be? Some will be expecting a liftoff in 2022, how many more in 2023? The median was pinned down through 2022 in June If the consensus is for hikes, it could be bullish USD.
From Westpac:
"FOMC projections on Wednesday may reveal a less dire 2020 GDP and unemployment scenario -they were more pessimistic than the market mid-June and the rebound since has surprised on the upside. But the Fed will continue to harbour concern about reduced fiscal support and flexible average inflation targeting will in any case cement the median dotsat the lower bound through end-2023. Powell may even flag the prospect for opportunistic reflation, i.e. upping the QE pace if inflation shortfalls persist in coming months.That should keep the bid tone in UST markets"
In the near term, an upgrade to 2020 GDP and downgrade to unemployment is almost a certainty. The 2020 GDP drop will probably improve to something like -3.5% from -6.5%. However uncertainty on the fiscal side clouds 2021 and as a result of the 2020 increase, it will likely come down.
CIBC expects a lift to the core PCE central tendancy in 2022 and 2023 and they see that pushing up the long end of the curve and the US dollar.
