FOMC Preview: What 17 major banks are expecting from March meeting?

Today, world markets are keenly awaiting the outcome of an all-important FOMC’s March meeting, and as we move towards the decision timings, here are the expectations as forecasted by the economists and researchers of 17 major banks.

The consensus amongst most economists and analysts suggest, that the Fed will likely leave its current policy rate unchanged, while the central bank is likely to move the median policy rate forecast for 2019 to just one hike from two previously. In addition, they are expecting that Fed will likely announce an end to its quantitative tightening.

ABN AMRO

“We expect the FOMC to keep interest rates on hold this Wednesday, and to announce an end to the balance sheet runoff in September, though there is a risk the announcement could slip to a subsequent meeting.”

“We expect Chair Powell to strike a somewhat dovish tone in his press conference, noting the continued global economic uncertainty given the lack of a stabilisation in the global industrial sector. However, we also expect him to acknowledge the substantial improvement in domestic financial conditions since late last year, and signs of resilience in domestic demand, such as the rebound in consumer confidence.”

“At the same time, while we expect a shift lower in the dots rate hike projections to show just one rate hike in 2019, this might disappoint financial markets, which now price in around 6bp of rate cuts by year end. We continue to think the Fed is done with rate hikes, but that it will maintain a modest tightening bias in its rate hike projections for as long as the economic outlook remains broadly positive.”

Standard Chartered

“We expect the FOMC decision on 20 March to leave the current policy rate unchanged, move the median policy rate forecast for 2019 to one hike (from two), maintain 2020 at one hike and discuss the end to the balance-sheet taper in a separate communication or at the press conference.”

“We believe the distribution around the median projected policy rate (‘dot plot’) in the Summary of Economic Projections (SEP) will be important. A tighter distribution around the median would be a dovish signal to the markets.”

“Further, we expect Chair Powell to de-emphasise the dot plot during the press conference. We also expect a modest downgrade to the GDP projections in 2019, unchanged inflation projections, and a modest downgrade to estimates of neutral policy rate and the non-accelerating inflation rate of unemployment (NAIRU). The median long-run potential growth rate estimate could decline as well.”

“With respect to the balance sheet, we expect the Committee to announce the framework for ‘tapering the taper’ at this meeting.”

“We believe the Committee will choose to end balance-sheet tapering gradually rather than at once, though this will be an operational rather than a policy-signalling consideration. We believe the Fed will announce reinvestments of MBS proceeds into Treasury securities, concomitantly shortening the duration of the portfolio.”

ING

“This week’s Fed meeting will see interest rates left unchanged and the central bank sticking to its “patient” approach to policymaking. However, look out for announcements regarding the balance sheet with “quantitative tightening” seemingly coming to an end.”

“Recent data has been somewhat mixed, so with inflation described as 'muted' the central bank can be 'patient' with regards to the timing of when to react with any policy change.”

“We would expect all of these words and phrases to get a mention in either the press release or the accompanying press conference on Wednesday. The only substantive change is likely to be a more cautious set of forecasts for the Fed funds target range. Rather than signalling two rate rises this year and one in 2020, we think they will opt for just one hike in 2019 with one more in 2020.”

“The balance sheet currently stands at just under $4trillion with the Fed signalling that it may bring this process of balance sheet reduction (or quantitative tightening) to an end as early as the end of this year. We could see this being formally announced on Wednesday and it would leave the Federal Reserve with a much larger balance sheet than was originally envisaged at the start of the process.”

SEB Bank

“There is little doubt that Fed will maintain the target range for fed funds rate at 2.25 to 2.50% at the meeting that concludes on 20 March. Revisions to Fed’s econ projections are likely to be relatively small but we expect median forecast for policy rate path (‘the dot plots’) to shift from indicating two rate hikes in 2019 to unchanged rates.”

“The Fed is finalizing its plan for the balance sheet but the result will likely be presented at the 1 May meeting rather than at the March meeting.”

Mizuho Bank

“No change in policy is expected so focus will be squarely on the press conference, new forecasts & Dot Plot.”

“A marginally firmer US dollar and a slightly higher oil prices should cancel each other out in terms of the inflation forecast. The risks to the CPI forecast are on the downside but should be modest.”

“Despite downward revisions to growth forecasts elsewhere, the US economy is holding up quite well and the Fed’s GDP forecasts are expected to be little changed. Limited changes in the growth and inflation forecasts suggest limited changes in the dots.”

“However, we suspect that with downside risks to activity overseas remaining on the radar, there will be a small downward revision to the dots but that they will still imply that higher policy rates rather than lower policy rates are more likely.”

Citibank

“Citi analysts expect the Fed to change the median “dot” to indicate one hike only in 2019 but with hawkish risks that it keep them unchanged at two. End of balance sheet reduction may also be announced and the meeting is also likely to see changes to the Fed’s assessment of the US economy.”

Westpac

According to analysts at Westpac, the market focus this week will be on Wednesday’s FOMC meeting, which is again likely to emphasis a need for patience.

“Of key interest will be the quarterly Summary of Economic Projections, including revisions to key forecasts, as well as any discussion around balance sheet normalisation.”

“The consensus is that the Fed Funds “dots” will be lower, but the key question is how far will they fall? The existing median for two hikes this year should likely fall to one, consistent with Westpac’s view. Two of seventeen dots expect no hikes this year, but with the Fed in data dependent mode and key communications underscoring the need for patience, it would be no surprise if this number was to jump significantly from two.”

“In addition, we will be very interested in the long run projection. It is likely to fall to 2.5%, which will provide some scope for a further fall in 10yr yields, although considering our expectation that yields should peak at or around the Fed Funds peak, an extended rally under that scenario should be short-lived. The more bullish scenario for bonds would be if the Fed were to indicate a willingness to cut rates near term.”

Deutsche Bank

“No change in policy is expected and the meeting should reinforce the message that the Fed will remain patient for now. That being said, our economists believe that there are two key topics that market participants should focus on.

The first is any signals about the timeline for ending the Fed’s balance sheet unwind and the second is any insights into the conditions needed to drop their patient guidance and possibly raise rates again later in 2019.”

“On the former, while an announcement of the date for stabilising the SOMA portfolio is possible this week, we now think it is more likely at the May FOMC meeting.”

“On the latter, Powell should maintain significant flexibility while likely reiterating that a dissipation of the crosscurrents, evidence of continued above-potential growth, & higher inflation are all likely preconditions for another rate increase this cycle.”

HSBC

“FOMC is expected to maintain the current target range for the federal funds rate at the March meeting.”

“The Fed’s narrative on interest rates has been clear since the dovish pivot at the January FOMC meeting: monetary policy is currently in a good place, and the FOMC will remain patient in assessing the need for any further adjustments to the policy stance.”

“The March FOMC meeting is therefore likely to reinforce this. The Summary of Economic Projections will be released at the same time and the median “dots” could show that further   rate hikes are likely, although less so than in December.”

Danske Bank

“We expect the Fed will keep the target range unchanged at 2.25-2.50% and make no major changes to the statement.”

“Powell & Co have emphasised that they will be " patient" in raising hikes but the question is what that means in terms of the "dots" , which are released alongside the rate decision.”

“We expect Fed to lower its 'dot' signal further to just one rate hike in 2019 (down from two). We expect them to be revised lower also for 2020 and 2021 and we will not be surprised if the Fed signals "one and done". We expect the longer-run dot is to be unchanged at 2.75%.”

“If the Fed confirms it has changed its reaction function by looking more at inflation expectations and less on the unemployment rate, a June hike seems less likely, as marked-based inflation expectations remain well below historical average.”

“Still, markets are pricing the Fed too dovish at the moment , as they think the Fed is on hold for the rest of the year. A change in Fed's rhetoric can happen fast. A good example is the rate increase in March 2017 where the market was not expecting a rate hike until Fed signalled it three weeks in advance.”

“We believe the Fed will announce it will end shrinking its balance sheet in Q4.”

Royal Bank of Canada

“The Fed is universally expected to hold the fed funds target range unchanged at the March 20th FOMC meeting alongside softening in Q1 GDP growth data and increased concerns about the global growth backdrop. And revised assessments of the most likely path for interest rates going forward are likely to show fewer and more gradual hikes through the end of 2020.”

National Bank Financial

“Keeping in accordance with its most recent communications, which emphasized the central bank’s wait-and-see approach, the Fed will stay on the side-lines this time. The newest version of the dot plot, for its part, should show participants lowering their rate hikes expectations for 2019 from two to one.”

“On February 27, Chair Powell said he expected the Fed balance sheet plan to be announced “fairly soon”. Thus, we may get more details as to when the Fed expect to halt the runoff of its balance sheet and what will be the reinvestment policy going forward for maturing Treasuries as well as for mortgage backed securities.”

ANZ

“The recent Fed guidance points to it cutting its interest rate guidance (dot plot) by around 50bp over 2019 and 2020, leaving one hike in the forecast horizon, which ANZ don’t expect the Fed to act on.”

“We have taken out our final rate hike and see policy on hold. The Fed’s tightening cycle looks done for the foreseeable future. Only a sharp and sustained inflation overshoot could trigger further hikes – a scenario we don’t envisage in the next couple of years.”

“The Fed may announce an end for quantitative tightening, but the specifics on the balance sheet’s hiatus period, optimal reserve holdings and the duration of its Treasury securities portfolio may not be addressed.”

“Chair Powell may be asked about whether the Fed will adopt an inflation overshoot strategy. We expect him to reiterate that the bar is high for changes to the current framework.”

Rabobank

“The Fed’s new set of projections is likely to reflect the more dovish statements since December," Rabobank analysts argue.

“The FOMC has taken a pause, but several participants are still thinking of hiking later in the year. On balance, we may still see one hike for 2019 in the dot plot. For 2020, the chance of no more hikes in the dot plot is considerably larger.”

“The March meeting may give us more details about the balance sheet normalization that is likely to come to a halt in the second half of 2019.”

“We still expect the US economy to slide into recession in the summer of 2020 and the Fed to remain on hold for the remainder of 2019, before cutting rates in 2020.”

NAB

National Australia Bank (NAB) analysts are eyeing that the dot plot charts for further cues on the interest rates outlook for this year.

“FOMC meeting on Wednesday will include a new set of forecasts and Chair Powell's press conference. There should be some hefty revisions to the outlook, with our focus on whether members still expect to hike rates this year and if the committee has adjusted its estimate of the neutral funds rates.”

“Recent speeches suggest members expect 0-1 more hikes this year, down from 2 hikes projected in December, and that the range for the neutral rate has been trimmed to 2.50-2.75% from 2.5-3.5% in December.”

“The Fed could also update its plans for its balance sheet, where we think the Fed will most likely halt the rundown by the end of this year.”

“Markets continue to price the Fed as being done in raising rates, with the next move priced as a 22% chance of a cut by year's end.”

Nordea Markets

“The Fed is likely to stick to its "patience" stance at the March FOMC meeting, with "patience" meaning that rates will remain on hold until it becomes clear whether the economic outlook has worsened as much as the markets seem to believe or whether the outlook will remain relatively bright after the fog clears, as the majority of FOMC members still seem to believe.”

“Based on recent speeches, we believe that at least half of the dots will have migrated lower, reflecting FOMC members' reduced inclination to hike rates, with the median down to one hike this year (from two in December) and another hike in 2020 (unchanged from December).”

“Market sentiment has brightened and the FOMC may decide to keep the announcement about the details of the end of quantitative tightening (QT) for a rainy day, but some details could also be announced as early as this week. Our baseline continues to be a QT tapering starting in Q3 and QT ending in Q4, with excess reserves around USD 1,000bn. It will be market-negative if the Fed announces that excess reserves will continue to drop after the end of QT.”

Barclays

“Recent Fed speak suggests that the Fed is likely to pare back its economic projections and the path of the hiking cycle at the upcoming meeting.”

“We believe the risks are skewed toward a dovish surprise. Fed may mark growth down by a tenth or so.”

“Fed is likely to leave its inflation forecasts unchanged. Should translate into a reassessment lower of the path of policy.”

“The median path of the funds rate may show only one hike over the forecast horizon, with the terminal rate at 2.5-2.75% and a neutral rate of 2.5%. Fed also expected to outline the path of the balance sheet.”