Fed Preview: Forecasts from 15 major banks, no taper now, but when?

The Federal Reserve is set to leave its policy unchanged on Wednesday, but signal when it intends to taper its $120 billion/month bond-buying scheme. The Fed's Monetary Policy Statement is due out at 18:00 GMT and as we get closer to the release time, here are the expectations as forecast by analysts and researchers of 15 major banks. Tensions are mounting ahead of the decision, with analysts divided over the taper timing, November or December.

In the view of FXStreet’s Analyst Yohay Elam, there is a high chance that Chair Powell conveys a dovish message, downing the dollar.

Danske Bank

“Given the weak jobs report and lower-than-anticipated inflation in August, we expect the Fed will refrain from providing more details at this meeting, as the Fed has already made it clear that tapering is set to begin before year-end. We believe the tapering pace is more important than the timing. We continue to expect that tapering will be concluded in mid-2022. We expect the Fed to raise the ‘dots’ by signalling the first rate hike in 2022 (up from 2023 currently). We still expect the first rate hike in H2 2022 in either September or December.”

Nordea

“We are not certain that the Fed will dare to present a firm tapering plan but we remain firm that they will have to take further steps toward becoming concrete on how and when already next week. On Wednesday they will likely launch a light data dependent guidance on the actual tapering implementation plan. The FOMC could decide to communicate that a 3 month moving average at acceptable levels in the monthly NFP report would trigger a tapering implementation in November or December. An average of 6-800K a month is likely enough to prompt an implementation already later this year as it will leave the Fed on track to fulfill the employment mandate already during the first half of 2022.”

Westpac

“While the August NFP miss saw Westpac push back the timing of the taper announcement from September to December, to allow momentum and risks to be further assessed, we continue to expect the process to run from January to June 2022. Thereafter, US activity and employment growth should remain robust, warranting a shift in the narrative around policy to rate hikes. Both stages of the policy outlook should be on display at the September meeting, with robust growth expectations to be confirmed and inflation seen at target. While the narrative will cover the risks, opportunities for the economy should be the focus.”

ING

“Covid caution and a jobs data miss mean the Federal Reserve will leave policy on hold but with inflation staying elevated and the growth outlook remaining good we expect a more explicit acknowledgment that QE tapering will start this year. A shift to a 2022 median rate hike is far from certain and if the FOMC meeting can pass without much fanfare, a neutral dollar environment and a neutral EUR/USD environment amidst low volatility can see continued demand for those currencies backed by hawkish central banks.”

RBC Economics

“The US FOMC may provide more hints on when the pace of asset purchases will be dialed back. That said, the Fed is expected to keep its foot firmly on the accelerator with no increase expected in the fed funds target range until late next year.”

TDS

“Officials will likely signal that they are almost ready to taper. We expect a formal announcement in Dec, not Nov, but we will review our forecast after the meeting. While median 2022-23 dot-plot projections will likely be unchanged, the math makes any changes much more likely to be up than down. The 2024 dot plot will likely show further, gradual tightening. Median inflation/growth projections for 2021 will have to be raised/cut. While we think the FX reaction should be contained, the balance of risks leans towards a more hawkish outcome especially given the low bar to shift the median dot-plot higher. From a risk/reward perspective, that favors some modest USD upside.”

NBF

“After what was a disappointing August jobs report, it’s unlikely we’ll see the Fed formally announce the tapering of its outsized asset purchases. We do, however, still see that occurring this year, so we’ll be closely following Powell’s press conference for clues on exact timing. While an official announcement isn’t expected to be in the cards, look for the Fed chair to continue to pre-emptively break down any perceived links between the timing of the taper and rate hikes. On inflation, we expect the transitory narrative to be prevalent once again, both in the statement and press conference. Finally, the statement will also be released alongside a fresh Summary of Economic Projections. While June’s SEP saw growth projections upgraded and rate hikes moved into 2022, we don’t expect the same momentum this month.”

BBH

“No change in policy is expected but we expect a hawkish hold as the official statement and the minutes should continue to lay the groundwork for tapering this year. The Fed is likely to wait until the November 2-3 meeting to make an official tapering announcement, with a likely start in December. Consensus sees the Fed starting to taper in late 2021 or early 2022 and then starting to hike rates in early 2023, which are ultimately dollar-supportive if underpinned by an economic recovery and not just rising inflation and inflation expectations. New macro forecasts and Dot Plots will be released. According to the Fed’s June projections, it will have met its dual mandate by the end of 2023 and the new projections should continue to underscore this with some modest upgrades. Of note, 2024 will be added to the forecast horizon this week and will be another crucial part of the Fed’s forward guidance. This week’s Dot Plots will be very interesting, as we suspect that more than seven will see the first hike coming in 2022.  If another three policymakers move their lift-off expectations up to 2022, then the median will also shift forward to 2022.”

ANZ

“The FOMC’s 2021 inflation forecast is set to be revised sharply higher, though this largely reflects past developments. Fed Chair Powell is very likely to restate that the rise is temporary and that inflation should return to a pace consistent with its 2% target next year. We don’t expect a change to forward guidance on rates or asset purchases, but we do expect a signal that the Fed is getting closer to tapering. Powell is likely to reiterate the statement he made at Jackson Hole, namely that tapering can start later this year. A significant upgrade to inflation may result in the median of FOMC members foreseeing a rate hike in 2022, which could cause some market volatility. However, the median of FOMC voters is unlikely to be projecting a hike within that time frame. We expect to see plenty of discussion around the dynamics of underlying inflation in the Q&A. Powell is also likely to receive probing questions around the potential thresholds for rate lift-off.”

SocGen

“While the press conference with Chair Powell should reinforce a message that tapering is coming soon, the COVID-19 situation and mixed trends in the economic data do not provide a green light quite yet. More likely, the FOMC on 3 November is the better option. The summary of economic projections should be very interesting. The SEP and accompanying dot-plot include 2024 in their scope. The inclusion offers more insights on the pace of hikes when the Fed actually begins lifting rates. There is always a chance for 2022 hikes, which is a large factor behind our updated tapering call. We now see the Fed fully winding down asset purchases by summer 2022 in case Fed officials see a need to lift rates by late next year. Opening the option should be the strategy. We do not see a majority of Fed officials ready to lift by then on the evidence accumulated so far. An inflation view by the FOMC that continues to show inflation near 2.0% in 2022 and beyond would underscore a view that officials continue to see the recent blip as temporary. Last June, the FOMC median foresaw a 4.5% unemployment rate for 4Q21. We see no reason for a change.”

CIBC

“The FOMC will maintain an optimistic take on what lies beyond a somewhat dented near-term picture. But there could be just enough uncertainty tied to the Delta variant, and doubts in the wake of the last payrolls data, to push off the tapering announcement until the next meeting. A close alternative would see the Fed press ahead with a formal warning of tapering before the end of the year, but leave it conditional on seeing further job and activity gains in upcoming reports.”

Rabobank

“The FOMC is likely to give us ‘advance notice’ of tapering before the end of the year. We expect a formal announcement in November, with the actual start in December. Powell may also provide a rough sketch of the taper time schedule, which we expect to be completed before the end of 2022. The economic projections will be extended through 2024, which means we’ll get the first dot plot including 2024. Meanwhile, the dot plot may be getting closer to a first hike before the end of 2022. While Powell is likely to repeat his arguments why inflation is ‘transitory’, the inflation projection will tell us how long the FOMC thinks this is. Powell is likely to repeat that the end of tapering does not imply the start of hiking.”

Deutsche Bank

“We expect the statement to adopt Chair Powell’s language that a reduction in the pace of asset purchases is appropriate ‘this year’ as long as the economy remains on track. Although we see Powell maintaining optionality about the exact timing of that announcement, our view is that the effective message will be that in the absence of any material downside surprises, the bar to pushing the announcement beyond November is relatively high. For the dot plot, we expect there’ll be an upward drift in the dots that raises the number of rate hikes in 2023 to 3, followed by another 3 increases in 2024.”

UOB

“Powell’s speech at Jackson Hole Symposium did not change our view and we still expect the Fed to further articulate a pledge of the taper timeline in the upcoming 21-22 September 2021 FOMC, which will likely last for nearly 1.5 years until May 2023. Thereafter, we project two 25bps rate hikes for 2023, first to 0.25%-0.50% in June and to 0.50%-0.75% in December.”

ABN Amro

“We expect no formal changes to be announced at this meeting, although we are likely to get some changes to the policy statement suggesting an announcement on tapering is imminent. Specifically, the Fed could tweak the part of the July policy statement linking the pace of asset purchases to progress toward its goals to something along the lines of: ‘the economy has made further progress toward these goals, and this is likely to warrant a reduction in the pace of asset purchases in coming meetings.’ As a base case, we expect the Fed to formally announce a tapering of its asset purchases in November, with the first reduction in purchases starting in December.”