So, Don't Expect The Fed To Rush Rate Hikes - page 4
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Will Fed Hike Discount Rate On Monday? The Federal Reserve holds a discount rate meeting on Monday. There is some speculation that the 75 bp discount rate could be lifted. At the September meeting - which isn't the same as the FOMC meeting -- five of the 12 regional Federal Reserve banks voted in favor a raising the discount rate. One favored cutting it.
The economic data has generally strengthened since then. Last month's FOMC statement and subsequent official comments have indicated that most officials appear on board with a December rate hike, barring a shock.
The discount rate is set by each of the regional Federal Reserves subject to the review of the Board of Governors. Despite reference to the discount window, to be clear, the discount rate is not a discount, but a premium over the Fed funds rate. And of course, a bank does not go to a window to access the funds.
We have argued, and the Fed's Vice Chairman Fischer emphasized the point earlier this week, that the Fed has done everything to avoid surprising the market with a rate hike. Even if one thinks it will ultimately decide not to hike next month, or does not think the Fed should hike, as the IMF among others have argued, a December hike will not be a surprise.
A discount rate hike can be seen as a technical adjustment as part of the normalization process to have a wider spread between the Fed funds target and the discount rate. Their proximity is another way to gauge the stance of the Federal Reserve. However for many, a hike in the discount rate would be a surprise and could be seen as delivering the FOMC a fait accompli for its December meeting. It would potentially steal the Fed's thunder and needlessly be seen as pre-committing it to a move.
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USD: A Heavy Dose Of Data On Tap; What To Expect? - BNPP
The USD’s pullback will likely be short-lived asthe long USD positioning is not stretched yet, says BNP Paribas.
The USD should remain well-supported into key December event risks, even if risks are for a deeper pullback in the US currency after the ECB and Fed deliver policy measures in line with consensus.
Today, the US gets a heavy dose of data before markets close Thursday for the Thanksgiving holiday and re-open for just a half day Friday.
"We expect a solid reading on durable goods orders after a weak September, mainly due to autos and aircraft, but core orders are also likely to return to positive territory.
Meanwhile, the core PCE deflator in the October personal spending report is expected to hold stable at a 1.3% y/y rate, still below the Fed’s 2.0% objective but at least not moving in a troubling direction.
Lastly, we expect the Michigan sentiment survey to improve," BNPP projects.
Fed releases Yellen statement ahead of meeting on lending Details of emergency lending restrictions
That last line doesn't sound to good
The Fed will be voting on these changes at a meeting today
"Time To Hike Rates?" The Last 2 Times ISM Manufacturing Was Here, The Fed Unleashed QE1 & QE3 While it is hoped that the economy can continue to expand on the back of the "service" sector alone, history suggests that "manufacturing" continues to play a much more important dynamic that it is given credit for... and that is a major problem as ISM Manufacturing just fell below 50 for the first time since Nov 2012, crashing to 48.6 - the weakest since June 2009. Across the components, new orders collapsed (worst since Aug 2012), and prices paid crashed.
When ISM Manufacturing dropped to this level in early 2008, people largely ignored it at first... then The Fed unleashed QE1 to save the world... same again in 2012...
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Dollar turns around after Michigan survey shows a chipper US consumer USDJPY back above 121, EURUSD loses 70 pips from the high The move in the euro confirms the liquidity issue I pointed out earlier
The Michigan numbers aren't usually massive market movers but that jump in conditions has halted the slide. As I said in the data post, sentiment is one thing, converting that to cash through the shops is another
Michigan survey director Richard Curtin has been out with the conf call;
Beware of the retracement of the retracement now as liquidity won't have suddenly got any better
Pre-FOMC: Time To Hike - SEB
LIFTOFF ALMOST GUARANTEED. In all likelihood, the Fed will raise the fed funds rate by 25 basis points thus taking the target range to 0.25-0.50 per cent at the meeting that concludes on 16th December. Markets are pricing in a very high probability of liftoff; while the chance of a 25 basis point hike is 76 per cent according to futures the hike may well be fully priced since a 25 basis point hike may actually raise the Fed funds rate by less due to excess liquidity in the system. Most Fed watchers see liftoff too; only 3 of 101 expect unchanged interest rates according to a Bloomberg poll.
UNANIMOUS DECISION? While Chair Yellen certainly would like a unanimous decision at such an important meeting, she may not get it her way. In our view it is Chicago Fed’s Charles Evans who is the most probable dissenter, but since he will not have a vote in 2016/17 the implications for future policy would be minimal. Evidently, Fed governors Tarullo and Brainard are leaning in dovish directions too but neither of them has actually dissented in the past. It is also good to know that while Governors voting against the majority are not unprecedented, one has to go all the way back to 2005 to find the last time that happened. Evidently the dovish Minneapolis Fed’s Kocherlakota, who most likely was the one who wanted a negative Fed funds rate back in September, will not attend the December meeting and will be a non-voter in 2016.
DOVISH PRESS CONFERENCE. At the press conference we expect the Chair to provide a dovish message further underlining the gradual nature of this tightening cycle – which stands in sharp contrast to the “measured pace” language and the series of hikes in 2004-2006 for example. To further back up that message, it is our impression that markets are looking for cuts in the median Fed projections to, say, 1.125 per cent by end-2016 and 2.375 per cent by end-2017. But in our view the surprise potential here is for unchanged dots, at least as far as 2016 is concerned. While markets initially may respond negatively to largely unchanged dots, in our view the press conference is much better suited to get the dovish message across in any event. Look, the dots are not known by the Chair in advance since they are submitted before the meeting begins and as such they are not reflecting any consensus-building efforts.
Fed Dots Show Four Hikes Next Year The Summary of Economic Projections (SEP), as the quarterly forecasts from the 17 Federal Reserve governors and regional presidents are officially known, have not changed much since three months ago, confirming that the US economy has been performing largely in line with earlier projections.
By the end of next year, the Fed expects the federal funds rate to rise to a median 1.375%, which would imply four more 25 basis points hikes, following the lift-off on Wednesday.
In 2017, officials are aiming to push the policy rate up to 2.375%, which will take another four hikes - that is one increase less than in the previous projections in September.
Three years from now, the benchmark should be at 3.250%, following a final three-and-a-half increases, which is an eighth of a percentage point less than what the Fed had expected three months ago.
Afterward it should settle at 3.5%, which the Fed currently judges to be the equilibrium rate that will keep the jobs market near full employment, while promoting steady 2% inflation in the medium term. The long-run projection remained unchanged compared with the previous issue of the quarterly forecasts.
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How Many Fed Hikes To Come?...And When? - Danske On Wednesday, exactly seven years after the FOMC lowered the federal funds rate to 0- 0.25%, it raised the rate by 25bp to 0.25-0.50%, which concluded the G10 interest rate decisions in December including in our backyards of Sweden and Norway. Interestingly, all G10 central banks with the exception of Bank of England (BoE) have been less dovish than expected. This suggests that central banks are less worried about the deflationary risks from the collapsing oil price than what many have expected.
Markets initially took the Fed hike well, which reflects that it was the ‘best flagged’ in history. The Fed rate hike removes uncertainty from the market, which is a positive thing, particularly for markets that have been pressured by Fed rate hike expectations such as emerging markets (EM). However, the question remains whether it will be better in the future. More on this below. On Fed, the outcome was broadly in line with our and market expectations. We note that the ‘mean dots’ were moved down by around 19bp in 2016 compared to the September meeting despite the ‘median dots’ being unchanged (see chart 2). In addition, most of the voting members in 2016 will be dovish-to-neutral despite more hawkish regional Fed presidents becoming voting members next year.
We stick to our view that the Fed will hike three times in 2016 and four times in 2017, i.e. a total of seven hikes until year-end 2017. In light of this, we find the current market pricing too soft (see chart 3). The market is pricing Fed to hike in June and in December 2016. This leaves only two full hikes priced in for 2016 and an additional two priced in for 2017. We expect the Fed to hike in April, September and December next year.
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