- Benchmark US 10-year bond yields have risen more than 20 basis points ahead of tonight’s rate announcement by the US Fed.
- However, Citi says the median projections for future rate increases by US Fed committee members may tilt to the dovish side.
- Economist Andrew Hollenhorst also thinks officials may remove the word “accommodative” from the Fed’s policy statement.
Tonight’s interest rate announcement by the US Fed (4am AEST) is the main event for global markets this week.
Benchmark interest rates are almost certain to rise by 25 basis points to a range between 2-2.25%, so all the focus will turn to the Fed’s outlook.
Ahead of the meeting, US bond yields have been steadily rising, with benchmark 10-year yields climbing from 2.87% on September 6 to 3.098% this morning.
That’s just shy of the 3.12% high reached in May, which has led to speculation that bond markets are positioning for a more hawkish outlook from FOMC committee members.
But Citi economist Andrew Hollenhorst disagrees.
“We see risks tilted dovish going into the meeting,” he said.
Hollenhorst based his analysis on the Fed’s “dot-plot” — a tool used to show the interest rate projections of the 12 committee members who vote on monetary policy.
Each dot represents a member’s view of where interest rates should rise to in each calendar year to 2020, as well as where rates should peak.
Hollenhorst said Fed chair Jerome Powell has made it clear that 2020 is too far away for projections to be worthy of much emphasis, so he focused on the 2019 outlook.
The chart shows the median forecast among Fed committee members is for rates to rise to a range between 3-3.25% by the end of 2019:
That suggests another rate hike in December, followed by 2-3 additional hikes in 2019.
The Fed’s 12-member voting group rotates across different Fed offices so its composition changes over time.
On this occasion there’s an incoming member — the Fed’s newly appointed vice-chair Richard Clarida.
“Clarida may be more dovish than former New York Fed president William Dudley,” Hollenhorst said.
Dudley’s vote will be replaced by new NY Fed president John Williams.
“Fed officials may also remove the reference that policy is ‘accommodative’ from the statement,” he added.
Dropping “accommodative” would be dovish, because it indicates committee members are of the view that the Fed is now closer to the end of its current tightening cycle.
Hollenhorst said he will also be keeping an eye out for any commentary from the Fed on its balance sheet reduction plan.
He noted the the effective federal funds rate (EFFR) — a gauge of short-term liquidity in the US financial system — has been moving towards the top of the Fed’s target 0.25% range.
That “has prompted speculation that balance sheet reduction may be stopped early, although we expect it will continue through 2019,” Hollenhorst said.
“However, we do not expect any clear guidance from Fed officials at this meeting.”
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