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Goldman Sachs, Morgan Stanley, and JP Morgan are among the big names expecting a new Fed-led monetary easing program this Wednesday.BofA Merrill Lynch economists Michael Hanson and Ethan Harris have their doubts. From a new note to clients:
We also now think that the Fed will not start hiking interest rates until mid-2015 at the earliest. The exact timing of these actions is a tactical question that depends on deteriorating labour market conditions, lower inflation, and heightened downside risks to the outlook. Thus, we see roughly a 1-in-3 chance of a significant policy easing at the June FOMC meeting. However, we think it is more likely that the Fed releases a very dovish statement and downgrades its forecasts, but otherwise holds pat. This outcome would likely yield at least mild disappointment by the markets.
The BofA economists expect to get some confirmation of this de facto easing soon, owing to the new communication policies the Fed began employing earlier this year:
The other policy options available to Fed officials are on the communications front. Chairman Bernanke has advocated for a closer link between the SEP and policy; other members have proposed linking the forward guidance language more closely to economic conditions. Fed officials also could provide further guidance about the future path of the balance sheet. The upshot of one or more of these communications innovations would be to push out the likely timing for the first rate hike to mid-2015 at the earliest. We expect to see this happen at one of the next several Fed meetings as well. Further Fed easing on multiple fronts is, in our view, just a matter of time.
We recently highlighted a chart from BofA showing that forward rates implied by futures contracts are pricing in a rate hike in line with current Fed expectations in late 2014.