I thought I had already posted the Goldman Sachs Federal Open Market Committee preview ... but it was the Bank of Japan one I posted:
D'oh!
Never mind, its not too late! (bolding mine)
We expect the FOMC to officially announce ... that balance sheet runoff will begin in October.
- As the Fed has already communicated extensively about its plan for a gradual and predictable runoff, we expect markets to focus instead on the outlook for the federal funds rate.
The key question is whether the committee's expectations for the federal funds rate have declined in light of the surprising deceleration in the inflation data since the start of the year.
- Several Fed officials have expressed reduced confidence in the view that the recent decline is a blip and that inflation will reaccelerate.
- Despite ... stronger- than-expected CPI report, Fed officials will still be looking at year-over-year core PCE and CPI inflation rates that are three tenths and five tenths lower, respectively, than in March.
- We therefore look for lower core inflation in the Summary of Economic Projections (SEP) and expect the "dot plot" to show a decline in the average projected funds rate path.
While risks are tilted to the downside, we still expect the median projection to continue to show a third rate hike this year, 3 hikes in 2018 and a longer-run funds rate at 3%.
Ultimately, there are three reasons why we expect only minor dovish changes.
- First, several influential FOMC members have highlighted that there is not yet enough data in hand to abandon the view that the economy is close to full employment and that diminishing spare capacity will gradually push inflation back up to the target.
- Second, growth momentum has remained very firm and while hurricanes will make the activity data noisier in the near term, they are unlikely to derail firm underlying trend growth.
- Third, financial conditions have continued to ease even as the FOMC moved to a path of quarterly tightening last December.
