Fed Forecast: QE taper to continue as planned at April meeting

This month's Fed interest rate meeting will not be accompanied by a press conference and as the recent economic data has been satisfying, the FOMC is not expected to modify monetary policy. The QE taper should continue at the same pace, while investors focus their attention on the statement released after the announcement of the decision, searching for hints on when to expect the first rate hike.

Yohay Elam believes that for “bigger fireworks” we will have to wait until the June meeting but meanwhile the US GDP release, scheduled earlier on Wednesday, will probably "steal the show.”

The recent US economic data has been mixed but nevertheless pointing to a pickup in activity so it shouldn't “interrupt the $10 billion cut of facilities,” as Valeria Bednarik remarks. Also, Steve Ruffley reaffirms that “Yellen and the FED are unlikely to move on rates until the reduction of QE is complete,” so no steps in that direction are expected anytime soon.

Still, the market which “seems to be at ease with the current pace of tapering,” as Alistair Cotton observes, will in instead try to determine “when interest rates might begin to rise and at what pace,” judging from the statement released after the announcement of the monetary policy decision. However, we might rather expect to obtain more information on the Fed's direction from Janet Yellen's speech at a bankers' summit in Washington scheduled for Thursday.

In his comment Steve Ruffley already offers a prediction: “once the UK raises rates, probably in Q3 this year, the FED will follow suit and raise in early 2015. Then the real test the economy will begin,” he adds.

The FOMC will announce its monetary policy decision on April 30 at 18:00 GMT. Below you will find the full forecasts of the contributing economists.

Steve Ruffley - Chief Market Strategist at InterTrader.com:

"Yellen and the FED are unlikely to move on rates until the reduction of QE is complete. The markets in general are performing well, in my option a little too well. With S&P failing to get back to 1900, with the increase tensions with Russia and the a natural correction due I can see the markets having a major sell off over the coming months.
 
The is talk of the ultra low rates actually now beginning to hurt the average American saver. With rates so low there figures that show savers have missed out on around ¾ of a trillion dollars over the last 4 years. It is also not a question anymore of if, but when the FED will push up rates. My prediction is that once the UK raises rates, probably in Q3 this year, the FED will follow suit and raise in early 2015. Then the real test the economy will begin."

Yohay Elam - Analyst at Forex Crunch:

"The Fed is likely to taper bond buys for the fourth time to $45 billion / month, continuing the current policy. After Yellen dropped the forward guidance in her first decision, no other policy changes are likely. The focus could be on how the Fed sees the economy. If it expresses worries about the winter slowdown, the dollar could slide, and if it is upbeat on a spring bounce, the dollar could rise. The data is mixed, so the Fed might adopt a cautious approach. The bigger fireworks will probably wait for June, when the data will be clearer and a press conference accompanies the decision. For the upcoming decision, the GDP release made earlier on the same day could 'steal the show'."

Alistair Cotton - Corporate Dealer at Currencies Direct:

"The market seems to be at ease with the current pace of tapering, so thoughts are now turning to when interest rates might begin to rise and at what pace.
 
The Fed publishes board members’ estimates of the Fed fund rate each member thinks is roughly appropriate looking out into the future for the Fed’s duel mandate to be accomplished. What the estimates show is just how diverse views are within the US central bank once we move into 2015, ranging from zero to three per cent. That might not seem like a big difference but in central bank terms the difference is the size of the grand canyon. To hit three per cent by  2015, we would be looking at half the meetings raising rates by 0.25%. The market is therefore looking for further clarification on forward guidance and really wants greater commitment from the Fed on when they might begin to raise rates."

Ilian Yotov - FX Strategist and Founder at AllThingsForex:

"Nothing in the latest U.S. economic data suggests that the Fed will lose some of its taper momentum. The U.S. central bank would be likely to stay the course with another $10 billion reduction in April. As long as the economy keeps showing strength, the market could start pricing more aggressively an announcement of the end of the QE program on October 29, 2014, which could give the U.S. dollar a significant boost in the months ahead."

Bill Hubard - Chief Economist at Markets.com:  

"When the FOMC gathers once again on 29-30 April, it will be ‘steady as she goes’ and onwards and upwards with NO change in direction OR rhetoric from the March meeting. Strong growth data and less concern about downside inflation risks convinced the Treasury market to complete the reversal of the substantial dovish re-pricing of the Fed rate outlook after the FOMC minutes last week. The January 2016 fed funds futures contract lost 3.5 bps to 0.84% after having rallied from 0.825% last Tuesday to 0.735% last Thursday, and January 2017 lost 7 bps to 1.98% after rallying from 1.94% last Tuesday to 1.775% last Thursday. The 1.98% level on Jan-17 is now a bit higher than the 1.91% close on March 19 right after the FOMC meeting, which was up from 1.69% ahead of the meeting.  

That’s still somewhat below the high of 2.08% ahead of the employment report and is remains on the dovish side of the March SEP forecasts that showed only 4 of 16 FOMC participants looking for a fed funds rate below 2% at the end of 2016. Even if Yellen was one of the two 1.75% dots (we think it’s very unlikely she was one of the two big outliers at 1.25% and 0.75%), with any kind of term premium on a 1.98% Jan-17 fed funds contract, the market would be in line with her March baseline ‘6 months after’ comment."

Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:

"For the next Fed monetary policy meeting I expect the US central bank to continue what it has started - this time a 10 bln USD QE taper. If the QE program is not reduced, this would send a strong signal that something is wrong. I do not think there is so we should expect the exit from stimulating the economy with "printed" dollars will continue. The the FED policy encourages risk taking - this leads to some misallocation of resources. If that leads to a crisis is a different thing though and it depends on many variables. Low rates will remain in the US for some time (it is a known fact which has been discounted by the market) so I do not see a bubble market forming on the bond market."

Valeria Bednarik - Chief Analyst with FXStreet:

"When it comes to FED economic policy meeting, market is far from expecting surprises, considering last month Yellen trimmed hopes a rate hike will come as soon as the Central Bank ends its current tapering program, as she suggested with her first March speech; sort of a learner error quickly amended. Yet is notable that the economy is finally picking up, and latest economic readings had been far from enough to interrupt the $10 billion cut of facilities as planned. Therefore, the most likely scenario is another cut down to $45B, The market will most probably show little reactions to the news as the cut along with the unknown date of rate hikes is already priced in."

Alberto Muñoz, Ph.D. - Forex Analyst at FXstreet:

"I would not expect any important news next Wednesday as US economic data remain mixed. The Fed will taper again the pace of its asset purchases by another $10bn, split evenly between Treasuries and agency Mortgage-Backed Securities. Then we will have to pay close attention to the speech scheduled for Thursday, as probably Yellen could offer some clues about the next Fed steps, though I would not expect any surprises here, just some dovish tone as she has recently suggested that unexpected twists and turns could force the Fed to diverge from its current plan to end asset purchases later this year, which could spark a rally against the greenback, pushing the Euro above 1.3900."