For the second time in 12 months, the US Federal Reserve’s FOMC will almost certainly hike interest rates by 25bps at the conclusion of its December policy meeting.
Given that mindset, and somewhat unusually, that means that the subsequent market movements following the meeting will be driven by the FOMC’s updated summary of economic projections (SEP), and the tone of the accompanying monetary policy statement along with Janet Yellen’s scheduled press conference, rather than the rate decision itself.
According to BAML’s US economics team comprising Ethan Harris, Michelle Meyer, Lisa Berlin and Alexander Lin, the SEP, in particular, will be influential on financial markets, especially the FOMC member projections for the outlook for the Fed funds rate, simply known in markets as “the dots”.
“We do not expect a change in the dot plot from the September meeting,” the quartet wrote on Tuesday.
“That said, the risks are asymmetric in that there is a better chance of a move higher than lower in the trajectory. We think the dots for next year are the most vulnerable — by our calculation, only two members need to shift the dots higher to move up the median expectation for 2017 or 2018 by 25bp.
As a reminder of what individual FOMC members were projecting, here’s “the dots” from its September meeting:
They say it’s possible that stronger GDP growth and the recent drop in unemployment may prompt some members to adjust their forecast.
As for the FOMC’s economic projections, they believe that the FOMC is likely to change it’s medium-term projections, but not those for the longer term.
“We think the median unemployment forecast for 2016 will fall to 4.7% from 4.8% given the recent drop in the unemployment rate. We also expect GDP growth to be revised higher this year to either 1.9% or 2.0% on the back of stronger 2H GDP tracking,” they say.
They add that “looking ahead to the next three years, we think the risk is for upward revisions to inflation”.
Here’s what the FOMC were forecasting three months ago:
As for Janet Yellen’s press conference, Harris, Meyer, Berlin and Lin say that she will likely remain cautious, but note that the recent data on growth and inflation has been encouraging.
“We think Yellen will reiterate such in order to note that the Fed is still proceeding carefully with a gradual hiking cycle and that monetary policy remains accommodative,” they say.
The FOMC rate decision will arrive at 6am AEDT Thursday morning.