18 September, AtoZForex.com, Vilnius – With the September 17 passed, it would seem the anticipation was a lot greater than the whole event. The result was a hold and a dovish message. To clarify the note, Barclays and Bank of America Merrill Lynch have shared their Post-FOMC summary and further guidance.
FOMC summary, Barclays
The committee amended its evaluation of economic activity identifying for it to be expending at a moderate pace, based on the stronger flow of incoming data. Moreover, the Feds see a scope of labor market indications suggesting that job market slack continues to diminish, amid declining unemployment and solid labor gains. Although the improvements seem positive, the overall message is dovish.
Despite having three participants projecting an end-2015 funds rate of 0-25bp, six members expect two or more rate hikes, yet the majority continue to expect at least one hike by the end of this year. FOMC members’ have also decreased an estimate of NAIRU, lowering it to 4.9 – 5.2%, from 5.0 – 5.2 percent in June. To add to the concerns, committee has also decreased its estimate of the long-run GDP growth to 1.8 – 2.2%, down from 2.0 – 2.3 percent in June. However, the longer-run inflation outlook remained unchanged.
Barclays expects the Federal Open Market Committee to signal a December lift-off, the pace of tightening dots are one way to express a conviction about a rate hike for this year. “Although we see the statement as slightly more dovish than expected, we believe the majority of participants expect to hike rates this year. That said, we stand by our call for a March lift-off, as we continue to believe that the weak profile of inflation early next year will eventually push the FOMC out of 2015,” Barclays projects.
What is next? BofA
Having the FOMC not only failed to hike interest rates, the committee has also delivered a relatively dovish message.
“We view this as a tactical delay and have pushed out our forecast of the first hike to December. However, we still expect the Fed to hike faster than the market is pricing in, with four hikes in both 2016 and 2017,” Bank of America Merrill Lynch projects.
Two key messages in Fed’s directive were:
- The Fed is deeply concerned about global economic and financial developments;
- The Federal Open Market Committee has rejiggered its forecasts assuming these developments as risks.
Weight on USD
The US Dollar softened across the board post-FOMC event. Although the risk of a hike delay into next year has further increased, FOMC’s confidence of the labot market underpins a hike later this year.
Having a 30% chance priced into the yesterday’s meeting, Merrill Lynch’s analysts would expect “some near-term pressure on the USD—particularly versus commodity-linked currencies where USD positioning is largest—as the timing of the first hike is now less certain.” However, any significant the US Dollar weakness is likely to dovishly influence other central banks such as the ECB, given Merrill’s view of a December Fed hike. Therefore, the USD downside as limited, Bank of America Merrill Lynch projects.