A preview of the Federal Open Market Committee meeting due this week
This is via RBC:
- We think the probability is extremely low that the Fed doesn't hike at the upcoming meeting. We look for a 25bps increase in the target range to 2.25-2.50% and a 20bp increase in the IOER rate to 2.40%.
- A stand pat Fed would send multiple negative signals to the market including that there is indeed something wrong with the economic backdrop (despite good data) and/or that they are capitulating to the Trump administration's desire to see no further hikes-both seem likely to create credibility problems down the road.
- Moreover, despite a significant uptick in volatility, equities have not deteriorated enough to warrant a pause. U.S. equities on a total return basis are actually positive year-to-date so it is hard to argue there is a negative wealth effect that is feeding through to the macro backdrop.
- Accordingly, we look for very little change to the econ outlook and the dots. The dataflow just do not warrant a shift here.
- Note there will be 2 fresh dots (Daly replaces the stand-in San Fran Fed dot and Bowman is a new dot). Look for some trimming around the edges as both the low dot and high dot for 2019 are likely to come in, but overall we expect to see no change in the median and negligible change in the average.
- Finally, it seems likely they change the statement language on "further gradual increases" to something that reflects renewed hyper-focus on data dependence.
