FOMC Preview: 8 major banks expectations from June meeting

We are closing into the FOMC’s June policy decision and as the clocks tick closer to the decision timing, following are the expectations as forecasted by the economists and researchers of 8 major banks along with some thoughts on the future course of Fed’s action.

Most economists and analysts expect the FOMC to raise the Fed funds rate by 25bp to 1.75-2.00%. Post decision, all eyes will be on the forecasts and press conference wherein the big if for markets is whether the dot plot will signal three or four hikes in total for 2018.

Nomura

“We think it is highly likely that the FOMC will raise rates at the 12-13 June meeting. At this point, it would be extremely surprising were the Committee to forego a rate hike. Consistent with the May FOMC minutes, we believe the Committee will raise the target range for the federal funds rate by 25bp, to 1.75-2.00%, but will increase the interest rate on excess reserves (IOER) by only 20bp, 5bp lower than the top of the target range. Economic data have indicated accelerating activity over the intermeeting period, with an unemployment rate at 3.8% and inflation approaching the Committee’s 2% objective. Given that economic momentum has accelerated since March, we expect the Committee’s new rates forecast to reflect a total of four rate hikes in 2018, up from three previously. While a rate hike appears likely, we expect the mechanics of the policy change to be somewhat different in June.”

“Consistent with the May minutes and recent comments by Governor Brainard and San Francisco Fed President Williams in particular, we expect revisions to the post-meeting statement’s forward guidance language. Finally, we expect Chair Powell’s post-meeting press conference remarks, in addition to explaining the IOER adjustment and forward guidance language changes, to largely adhere to points made by Governor Brainard in her speech on 31 May.”

TDS

“The market is extremely well priced for a June rate hike next week from the Federal Reserve and they see that the FOMC will not disappoint. They expect the 2018 median dot to remain at three hikes for the year, with the dispersion in subsequent years to remain high.”

“Risks are largely balanced, but another non-committal press conference from Powell could leave uncertainty elevated. A drift up in the 2018 or longer-run dots, or emphasis on hiking beyond neutral this cycle, would be seen as hawkish. Conversely, discussion of trade concerns or decelerating global growth would be viewed dovishly, as would additional support for a protracted inflation overshoot.”

Rabobank

“Today is all about the Fed and when/if we start to see the protection that it has offered pulled back a little further. If so, it’s EMs that will be at the front of the line for volatility once again. The expectation today is of course that we get another 25bp rate hike. However, it will be the dot plot and Fed comments that will be of most significance: how many more hikes are we going to see pencilled in for this year, and for 2019?”

Danske Bank

“In line with consensus and market pricing, we expect the Fed to hike the target range by 25bp to 1.75-2.00% at next week’s meeting (the interest rate on excess reserves (IOER) has usually been at the high end of the range but is likely to be hiked by only 20bp as a technical adjustment).”

“We do not think the Fed is going to make big changes to its current dot plot and it will continue to show a more or less even split between those signalling three or four hikes this year. As only one member needs to raise its dot from three to four hikes, one should not necessarily interpret it as a hawkish signal if the median dot is lifted from three to four hikes.”

“The median dot for 2019 is likely unchanged at three more hikes and the Fed will continue to signal that it will raise the Fed funds rate above the natural rate, as it times to hit the brakes due to more expansionary fiscal policy. Our base case is one additional hike in December but the risk is skewed towards two hikes (i.e. three hikes this year with risk skewed towards four).”

ING

“With the economy set to expand 3% this year, we look for the Fed to hike rates again on 13 June with two further rate rises in the second half of the year. Also look out for the median Fed “dot diagram” of individual policy rate expectations creeping higher – potentially signalling that a majority of Fed officials favour two further rate hikes this year rather than the current even split between one and two in 2H18. It will also be interesting to see if the 2020 forecasts push higher, too, given comments from both John Williams and Lael Brainard that the outlook suggests “a policy path that moves gradually from modestly accommodative to neutral – and, after some time, modestly beyond neutral.” Consequently, there is scope for the language in the statement to become a little more robust, which could push longer-dated Treasury yields higher as well.”

Standard Chartered

“Expect the FOMC to increase the fed funds target range (FFTR) by another 25bps to 1.75-2.00% on 13 June, and adjust the interest rate on excess reserves (IOER) to 5bps below the upper bound of the FFTR.”

“We believe the median projected FFTR for 2018 will also rise (we expect an increase to 2.3%). Changes to the 2019 median remain a risk, although such changes face a higher hurdle than for 2018.”

“We believe the June statement is likely to reflect the expected movement of policy towards (and ultimately above) neutral, which was already apparent in the March SEP. One way to achieve this would be to alter the phrase “the federal funds rate is likely to remain, for some time, below the levels that are expected to prevail in the longer run”, thereby acknowledging the policy rate’s progress to the neutral level.”

Westpac

“Markets price as an effective certainty that the US Fed’s FOMC will decide to raise the funds rate by 25bp for the second time this year, to a target range of 1.75-2.00%. But there is plenty of scope for volatility as markets look at the accompanying quarterly forecasts. In these, most attention is likely to be on the “dots” showing FOMC members’ projections of the path of interest rates at the end of 2018, 2019, 2020 and “longer term.” The March projections were narrowly divided between 3 hikes in 2018 (Westpac’s base case and closest to market pricing) and 4 hikes, so this will be closely watched.”

“Fed chairman Powell’s press conference could also impact markets. After strong data and with inflation trending (gently) higher, he should sound confident about the US economy.”

Nordea Markets

“Fed is almost certain to hike the target range for the Fed funds rate by another 25 bp to 1.75-2.0%, while the interest rate on excess reserves (IOER) will be hiked by 20 bp, as hinted in the minutes of the May FOMC meeting, to keep the effective Fed funds rate in the middle of the target range.”

“Chair Powell is likely to spend some time on the symmetric nature of the Fed’s inflation target, basically telling the markets that the pace of rate hikes will not by increased in response to a mild and temporary overshooting of inflation, which is likely in the coming months. The 2% inflation target is not a ceiling, but the mid-point of the inflation target.”

“The June projections could show four rate hikes in 2018, although it will be a very close call between three and four. With five members indicating three hikes in 2018 in the March dots and five members indicating four hikes, it only takes one member changing from three to four to change the median.”

Click here to read more about the FOMC preview from our in house Chief Analyst Valeria Bednarik titled “FOMC Preview: hike on the table… too little too late?”