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    US June FOMC Preview: 11 major banks expectations Sandeep Kanihama

    We are closing into the FOMC’s June policy meet decision and the markets are going into the FOMC announcement without many expectations. As the clocks tick closer to the decision timing, following are the expectations as forecasted by the economists and researchers of 11 major banks along with some thoughts on the future course of Fed’s action.Most economists and analysts expect the no chance of a rate hike at the June FOMC meeting as they continue to wait for the result of the Brexit referendum and assess the impact on the outlook for growth and inflation after the dreadful NFP numbers. Also, the post meeting statement, the economic projections and FOMC Chair Yellen’s Press Conference will be closely watched and the dot plot will hold important clues about when and how much the Fed will raise interest rates. But the big question is whether the Fed will keep the door open for a future rate hike or not?Goldman SachsAfter the weak May employment report, investors have effectively ruled out a rate hike by the FOMC this week, and most see little chance of action in July as well. The natural reaction of policymakers will be to await more information while keeping options open. We expect the Fed to stand pat this week, but to keep a rate hike in the near future on the table. We expect small changes to the economic outlook, and for the median funds rate estimate in the Summary of Economic Projections (SEP) to remain unchanged for this year; the pace of rate increases beyond this year will probably come down.We now see a 35% chance of a rate hike in July (down from 40%) and a 35% chance of an increase in September (up from 30%). At this stage we are not changing our subjective odds of a rate hike by September.INGThe possibility that the Fed would pause in June, but signal their intent to move imminently, is now looking very doubtful. The labour market “box”, which had been “ticked”, has now “un-ticked” itself. Throw into the mix concerns surrounding financial market conditions leading up to and potentially following the UK Brexit vote, and even a July hike is looking difficult. We are sticking to our long-standing September hike call. But this is far from a done deal. Markets are pricing in nothing until December.NomuraWe see essentially no chance of a rate hike at the FOMC meeting this week. The combination of weak US data – notably the employment report for May and the drop in the ISM nonmanufacturing index– and heightened stress in financial markets mean that we do not expect the FOMC to indicate that an interest rate increase is likely over the summer. We expect the Committee and Chair Yellen to suggest a July rate hike is still possible given the right circumstances but do not expect them to suggest that the next hike is imminent. As for a July interest rate increase, we do not expect the FOMC to signal that it is “off the table”, but a decision to raise rates in July would probably require a broad improvement in economic data and a reduction in uncertainty that is currently weighing on markets. Given these circumstances, we do not think that the FOMC will want to try and move near-term market expectations regarding the likely timing of rate hikes in coming months. We expect Chair Yellen to stress the key themes from her speech last week. We expect some changes to the FOMC’s backward-looking assessment of economic developments. Ironically, while aggregate demand has picked up in recent months, labor market performance has deteriorated. We think that will be reflected in the first paragraph of the FOMC statement.RBSThe FOMC concludes its June policy meeting tomorrow. Little action and few changes to the statement are expected given the upcoming Brexit vote and the recent slowdown in payrolls. The most notable changes will likely be in the Summary of Economic Projections’ “dot plot.” Our economists note that “As Yellen said in her speech on June 6, ’new questions about the economic outlook have been raised by the recent labor market data.’ Importantly, while we still see the median 2106 dot at two hikes, we expect a much larger number of members seeking one dot (to be specific, we see as many as 7 members looking for zero or only one rate hike this year). This gives our base case outlook for today a dovish skew, especially as we expect the tone of Yellen’s press conference to mirror her June 6th speech. While our base case leans dovishly, there is a chance the Fed is “accidentally hawkish.” Alternatively, the Fed may want to keep the status quo in order to (a) not roil the markets before Brexit and/or (b) save the bullet of an accommodative shift in communication in case it is needed post-Brexit or in a scenario where payrolls remain weak. Lastly, the Fed could be purposely hawkish in order to regain optionality for a July rate hike, though we view this probability as low after Yellen’s June 6th speech and given the upcoming UK vote.Lloyds BankUS Federal Reserve seems almost certain to leave its policy unchanged after its 14-15th June policy meeting. Markets currently attach effectively a zero probability to a June rate hike. While stopping short of emphatically signalling that interest rates will rise over the summer months we expect the message from the FOMC will be that they expect to hike rates in the near future. We continue to think that 21 September is the most likely date for the next rise in US interest rates. The focus for markets will be on the message the FOMC sends about its future intentions, and in particular whether there are any strong hints of a policy tightening at either of the next two policy meetings in July and September. While they will probably stop short of emphatically signalling a move at either meeting, we expect the FOMC to hint that rates are likely to rise in the near future. We forecast two rate rises of 0.25% this year, in September and December.Danske BankWe expect the committee to maintain the Fed funds target range unchanged at 0.25-0.50%. This is in line with both market pricing and consensus among analysts. As we believe no one expects the Fed to do anything at this meeting, we expect focus to be on the statement, updated economic projections (especially the so-called ‘dots’) and Fed Chair Janet Yellen’s press conference. In her latest speech, Yellen did not repeat that a hike ‘in coming months’ could be appropriate and she highlighted the downside risks to the US economic outlook, although she thinks the positive factors outweigh the negative ones. We do not think one jobs report is enough for the Fed to change its view on the economic outlook significantly given that other economic data have been good in Q2. This said, we cannot rule out the ‘dots’ being revised lower but this would be a dovish move.BNZWhile no one expects the Fed to raise rates, the post meeting statement, the economic projections and FOMC Chair Yellen’s Press Conference will be closely watched. On the back of the weak non-farm payrolls report and speeches by Brainard and Yellen, rate hike expectations have been pared back significantly, with markets pricing a rate hike by July at around 25% compared to 80% in the lead up to that payroll report and a full rate hike is now not priced until after March next year.ScotiabankThe UK referendum clouds the outlook for the Federal Reserve and will keep it on hold for now, but it is hardly the only reason for expecting little firm guidance from the FOMC. The meeting has become somewhat anticlimactic in the wake of the nonfarm payrolls reports for April and May that showed a marked deterioration in the pace of job growth to 123,000 in April and 38,000 in May for the weakest two month average in over five years. That rules out a hike, puts low odds on a July hike, and puts our September call at a lower probability while remaining our base case. A key risk to nevertheless watch will be whether median FOMC rate guidance continues to project two hikes over the remainder of the year and four hikes next year or inserts greater caution to a track record on Fed rate guidance that has been nothing short of abysmal over the years. Recall that in her recent remarks just before going into communications blackout, Chair Yellen did not repeat her comment that was made just days earlier about a rate hike being possible over ‘coming months’.Wells FargoWe expect the Fed to reiterate its concerns about the global economy at this week's FOMC meeting. While no rate hike is expected, the policy statement and the dot plot will hold important clues about when and how much the Fed will raise interest rates over the next couple of years. The financial markets are only pricing in a 53.4 percent chance that the federal funds raise by a quarter percentage point by the end of this year. We believe the dot plot will imply two quarter point moves by the end of this year but will likely have fewer hikes in 2017 and 2018, yielding a lower long-term federal funds rate than the current 3.25 percent.RBC CMWe expect Yellen will strike a balanced tone at the upcoming June FOMC press conference—similar to her recent June 6th speech. We think that this tone will not only find its way into her Q&A but, indeed, into the statement where on net we do not look for any material changes. As it relates to the Summary of Economic Projections (SEP), we do not think they make any adjustments to the 2016 dots for fear of pricing out the vestiges of hikes priced in by the market (members have done a lot of heavy lifting of late in order to get those odds up). We do expect to see some downward shift in 2017 dots which would impact the average, but we do not envision enough of a shift to impact the median.SocGenWe will get new growth and inflation projections and a new set of ‘dots’ to show us where the FOMC members say they think rates will be going forwards. All of that will be more interesting than the actual policy decision. FOMC needs three stars to align perfectly before hiking – the market has to have priced in a move sufficiently that we won’t be surprised when they act, the US data needs to be strong enough to justify a move (obviously) and global markets need to be calm. In order to assure markets of their good intentions they will reinforce a positive economic message, keep hikes on the table for this year, and deliver a ‘dot-plot’ that’s well above what is priced into markets.Click here to read more about the FOMC preview from our in house Chief Analyst Valeria Bednarik titled “FOMC meeting: between a rock and a hard place


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