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September FOMC Preview: Cheat Sheet
Tuesday, Sep 19, 2017

What's at Stake:

 

  • Balance sheet, balance sheet, balance sheet.
  • No sudden moves: to give its balance sheet announcement as soft a landing as possible, the Fed will try not to deliver any big surprises.
  • Rate outlook: market participants have already turned their attention to the question of whether the Fed will raise rates in December, and will scour the post-meeting materials and press conference for any clues.

Balance sheet announcement: the most important non-event of the year.

  • This announcement is the culmination of years of meticulous planning and communication; the FOMC has been careful to make the announcement a non-event precisely because it is so important.
  • Virtually everyone expects the Fed to announce a start date of October 2017 for its plan to gradually reduce its balance sheet, and Fed policy makers have said nothing to undermine that expectation. The removal of the threat of a government shutdown makes the announcement all the more likely, because financial markets are unlikely to face any disruption. Neither the latest inflation report nor the recent hurricanes will affect this.
  • This represents the last major move for the Fed to normalize its policy stance after its extraordinary measures during the financial crisis. All that’s missing is the start date. While other dates are possible, the prior guidance has been that the precise timing shouldn't matter, which suggests the FOMC will go for the simplest option.

The Dot Plot:

  • The median dot for 2017 should remain unchanged, but up to 3 more dots may drop below 1.375%, implying a slim majority remains for a rate hike in December. This follows from recent comments by Fed Presidents Kaplan, Harker, and Evans, who have all said they want to see more proof that inflation will rise before hiking rates again. Whether August inflation was enough proof remains to be seen, especially given the distortions from recent hurricanes.
  • Of course, there are several more inflation reports ahead of the December FOMC, and these policy makers may prefer to risk walking back expectations for a hike if inflation stays soft, rather than trying to resurrect them if inflation perks up. Either way, they will end up leaving the market close to 50/50 on a December rate hike. That will give the Fed leadership just what it wants: optionality.
  • The median dots for 2018 and 2019 are unlikely to move. It will be interesting to see how their dispersion shifts, but the uncertainty associated with the pending Fed appointments makes the dot plot less useful as guidance for 2018 and 2019.

The Economic Forecasts:

  • In response to data since mid-June, the projections for year-end core inflation are likely to decline, probably dragging the median down to 1.6% or even 1.5% from 1.7%. In contrast, the Fed‘s forecasts for 2017 GDP will drift upward, perhaps pushing the median above the previous 2.2%, to 2.3%. The unemployment forecasts are unlikely to change: and the unemployment rate has already declined as much as in 2016, despite job growth running slightly below the 2016 average.
  • This will be our first look at the 2020 forecasts and dots, but they are likely to show GDP, inflation, and the target fed funds rate all converging toward the long-run projections. Unemployment is the biggest question mark here, since it may be project to still lie below its long-run projection.

The FOMC Statement:

  • The FOMC statement will see few changes. The language on the labor market will be moderated, reversing some of the changes made in the July statement compared to June’s. The description of business fixed investment should get marked up after the strong Q2 GDP revisions.
  • If the recent hurricanes receive any mention, it will be to dismiss any fears that they will have lasting effects on the national growth rate.

The press conference:

  • The inflation puzzle: was the 5-month soft patch really “transitory” and how much stock does the FOMC put in the rebound in August CPI? Yellen must feel encouraged by August CPI, but one month is too little for her to feel vindicated. Moreover, the strength in August CPI was not particularly broad-based and questions about medical prices continue to loom. Also, how does she reconcile the idea of one more rate hike with a lower year-end projection for core inflation? Her precise level of confidence will be seen as one of the best indicators of the rate outlook.
  • Tightness of the labor market: The July FOMC minutes noted that even the Fed is beginning to question its traditional understanding of the relationship between labor markets and inflation. A number of theories were noted in the minutes and have been circulating among the commentariat. Reporters will try to feel out the Chair’s position on them and given Yellen's expertise in labor economics, any thoughts on full employment versus slack will receive extra scrutiny. The reality is that she, like the rest of us, is likely reduced to speculation at this point. Once again, it will be all about tone.
  • The dot plot versus the market: Financial markets are not currently anticipating three hikes a year in 2018 and 2019, which may lead reporters to ask the Chair about the discrepancy and what it means for Fed credibility. If so, Yellen is likely to brush this off, reiterating the reasoning behind the Committee's forecasts and noting the fundamental differences between market prices and FOMC forecasts. Over a horizon of several years, such divergences are not uncommon, and the real value in the Chair's response will lie in further detailing the Committee's core views.
  • Nomination rumors: The speculation about future appointments will be mounting, especially after Vice Chair Fischer’s letter of resignation and President Trump’s sudden spate of negotiations with Democratic party leaders. Time is getting short for the president to announce an appointment for Fed Chair, but Yellen will continue to steer far away from any questions about this. Under direct questioning, she may remind us of her views on financial regulation, but there's no reason to expect her to be any more forthcoming than she has been in the past.

about the author

As chief economist at iCIMS, an industry-leading provider of talent acquisition software, Josh Wright leads a team of data scientists in analyzing emerging trends in the U.S. labor market