FOMC preview: much of the same and a hike expected - Nomura

Analysts at Nomura offered a preview for this week's FOMC meeting (Wednesday).

Key Quotes:

"Given recent Fedspeak, we believe the FOMC will likely raise short-term interest rates at the 14-15 March meeting. Financial markets have already priced in an expected hike, but the main focus is on how the FOMC participants’ policy rate projections (the “dots”) will be updated in the Summary of Economic Projections (SEP). Specifically, if the median of the distribution of the dots moves up significantly, markets would consider this as a hawkish message (“a hawkish hike”)." 

"On the other hand, if the median of the dots stays the same as in the previous meeting (“a dovish hike”), the market impact of the release of updated projections should be limited. We expect the distribution of the dots to become less dispersed, largely because of the shift of the lower tail of distribution towards the median. However, we expect the median of the dots for 2017 and 2018 to remain unchanged, which currently imply three hikes in both 2017 and 2018. The reason for our forecast of the median of the dots is that dovish participants who had been cautious about the future path of the economy and inflation saw the downside risks somewhat diminish" 

"As for the longer-run policy rate projections, which represent participants’ estimates of the neutral rate, we expect the distribution to essentially stay the same as it was in December, indicating that their long-held views on potential growth, the balance between investment and savings, and other fundamental factors remains the same. In other areas of the SEP, we expect few changes to projections as incoming information, especially non-survey data, do not indicate any acceleration in real GDP growth and the unemployment rate has drifted in a very narrow range in recent months."

"However, the participants’ risk assessment of their outlook may also have improved and more participants could see the balance of risks weighted towards the upside. Moreover, the median of their forecasts for core PCE inflation for 2017 could be revised up slightly to 1.9% from 1.8%, reflecting the recent firming of core goods prices. Note that the FOMC removed the language on transitory factors holding down inflation from its statement after the previous meeting. The upcoming meeting will be followed by Chair Yellen’s press conference. It seems clear that the FOMC reached a strong consensus on the near-term trajectory for policy ahead of their last round of public comments."

"Not much has changed since they made those comments. In that context, we do not expect Chair Yellen to send a message that is notably different from what she gave us in her speech in Chicago. That said, she may note how external factors affecting the US outlook, including geopolitical risks, exchange rates and global financial strains, have eased in recent months. It will be worth noting how she characterizes recent changes in financial conditions."

"Anything she says on the outlook for fiscal policy may also be important. In the FOMC minutes for the prior meeting, some participants showed concern that fiscal policy proposals might not be enacted or could have unexpected economic consequences amid increasing optimism among market participants. But we do not expect her comments and answers to point to a distinctly different path for policy from the one she just laid out."