Federal Reserve Preview: Forecasts from 11 major banks, eyeing any hints of tapering

The Fed announces its decision and also publishes its quarterly forecasts for growth, inflation, employment and interest rates on Wednesday, June 16 at 18:00 GMT. As we get closer to the release time, here are the expectations as forecast by the economists and researchers of 11 major banks, regarding the upcoming announcement.

Markets are treading water in a typical pre-Federal Reserve session, with answers awaited on the timing of tapering bond-buying and raising rates.  

CE

“We don’t expect any major policy changes, but some of the optimism evident in April’s statement may have to be toned down. Chair Jerome Powell will probably play down any changes and emphasise that rate hikes are still years away, but he may face a trickier balancing act in discussing the Fed’s asset purchases. We expect the Fed to make a more formal announcement of future tapering in a few months’ time – perhaps by dropping a heavy hint at Jackson Hole before an official change of guidance at the September FOMC meeting. That would probably be consistent with purchases then being reduced gradually from the start of next year.”

TDS

“The tone will probably be slightly less dovish than in April. We expect the chair to say that the committee has started discussing a progress-dependent tapering plan while also emphasizing that action will require much more progress. Median projections for core inflation in 2022/2023 will probably rise slightly, consistent with a sizable revision to 2021 being viewed as ‘largely reflecting transitory factors.’ The median dot will probably show a rate hike by end-23. A less dovish Fed tone next week would help to stabilize the USD in the very short run.”

ING

“The Fed is expected to leave policy unchanged and again play down taper talk. Nonetheless, markets will be looking for hints on whether the Fed is starting to acknowledge that inflation may not be as transitory as thought. A technical adjustment to address the rapid build-up in excess liquidity is certainly possible, but dollar downside risks remain.”

NBF

“After a sleepy meeting in April, June’s FOMC decision should be a relatively more eventful affair. While we don’t expect any changes to the Fed’s policy tools (Fed funds target or QE), we might see the Fed start to ‘talk about talking about’ tapering QE at some point this year. An eventual move on its bond-buying won’t come until the Fed’s “substantial further progress” goal in labour markets has been met, but the outlook looks to have improved enough in recent months that they should feel comfortable at least discussing an eventual taper. The meeting will also feature a fresh Summary of Economic Projections which is likely to show the median dot moving to show a higher policy rate by the end of 2023. Recall in March’s SEPs that 11 of 18 FOMC participants weren’t projecting any rate hikes until at least 2024. Additionally, with inflation prints coming in hotter than expected, we’re likely to see PCE estimates revised higher too, though they’ll likely still be dismissed as transitory. In the subsequent press conference, we expect a heavy focus to be on the Fed’s bond-buying as well as the ‘transitory’ nature of observed inflation prints.”

Rabobank

“Given recent data, the economic projections of FOMC participants are likely to see an upward revision for PCE inflation in 2021 and the dot plot may be getting closer to a rate hike before the end of 2023. The Fed is pushing back verbally against fears that high inflation is permanent and should underline this in its inflation projections for 2022 and 2023. The discussion about tapering the asset purchase program is likely to start at this meeting, so it will be interesting to hear what Powell has to say about this topic at the post-meeting press conference. The practical problem for the FOMC is to assess whether ‘substantial progress’ has been made regarding unemployment and inflation while the data remain heavily distorted at least until early September. The unemployment forecast for 2021 may give us a clue about the Fed’s numerical threshold for tapering. An early warning signal for tapering will inevitably be given in a situation with data clouded by the temporary labor shortage.”

Nordea

“The updated dot plot may hint of one hike in 2023 as very few members of the FOMC will have to change their mind in a positive direction for that to happen. The Fed will have to address the ongoing surge in the ON RRP facility The NY Desk is likely to suggest a few technical changes to the policy framework to ensure continued smooth operations. The interest on excess reserves will likely be hiked by 5 bps. The counterparty caps will likely be widened further in the ON RRP facility as the market will continue to be flooded with liquidity during June and July.”

CIBC

“It’s too soon for the Fed to issue a formal warning about tapering, but there might be signals, if only when the minutes of this meeting come out, that the central bank was talking about tapering. Watch for the dot plots to shift the first hike into 2023 from 2024, as it won’t take a lot of votes to move that needle.”

Danske Bank

“We doubt that the upcoming Fed meeting will be a significant one. In particular, we are looking for changes in the communication on QE. We think the Fed will repeat that bond-buying will continue at the current pace ‘until substantial further progress has been made’ but that Fed Chair Powell will acknowledge that tapering discussions have moved closer at the press conference. We expect the Fed to signal one rate hike in 2023 (from zero currently).”

BBH

“We expect a hawkish hold stemming from a shift in the Dot Plots, upgraded economic forecasts, and potential tapering talk. With risks to US yields weighted to the upside, the dollar is likely to benefit from any bond market repricing of the Fed and inflation outlooks.”

ANZ

“Economic data highlight that the US economy is growing at a rapid clip. Robust demand and a number of supply bottlenecks have driven core inflation to a three-decade high. The FOMC is set to significantly upgrade its inflation forecast for 2021, but keep the out years unchanged. This would signify a view that the current phase of intense price pressures is temporary. We don’t expect a change to forward guidance on rates or asset purchases. There is a chance the median FOMC member pencils in a rate hike for 2023, but we are mindful that many officials still want to see actual progress on maximum employment before committing to an increase.”   

Goldman Sachs

“It’s too early for the Federal Open Market Committee to begin the "taper clock" in their preview. We do not expect Chair Powell to deliver the first hint at tapering in June. Powell likely agrees with Governor Brainard and President Williams that the labor market has not yet come far enough. We continue to expect the first hint in August or September.”