27 Apr 2015
Markets too dovish for a Fed hike – BAML
FXStreet (Barcelona) - The research team at BofA-Merrill Lynch, expects the April FOMC to be tilted to the dovish side, and further notes that this dovish tilt may not be enough for markets that are pricing in no liftoff before December.
Key Quotes
“Back at the March FOMC meeting, Fed officials agreed to rule out any change in policy rates. But that does not mean the April meeting will be uneventful: the FOMC will need to make some potentially important changes in policy communications. First, we expect Fed officials to acknowledge the recent poor activity data, but blame it mostly on transitory factors. Thus the statement should still posit that the economy is converging toward the dual mandate over time.”
“Second, we expect the FOMC to remove the language that transitioned from "patient" guidance to explicit data dependence in March. The statement may incorporate support for a "gradual normalization" of policy, but is very unlikely to explicitly rule out a June rate hike, even though the chance of liftoff then has become very low, in our view.”
“While we think these changes should produce a more dovish statement on net than in March, the market is far more dovish still....the market currently is not priced for a rate hike by the September meeting, let alone by June.”
“This presents a dilemma for the Fed: accommodate market expectations of an even later liftoff, or update their communications to nudge the market in the Fed's direction. Despite not wishing to repeat the taper tantrum, we expect the April statement to reflect more of the latter.”
“If our US Rates Strategists are correct that the market is likely to look past the April statement to the data this week and next, it would be an opportune time for the FOMC to complete the transition to a flexible, meeting-by-meeting policy stance. The risk is that the market is looking for the Fed to confirm an even more patient policy, and could be disappointed in light of the above discussion.”
Key Quotes
“Back at the March FOMC meeting, Fed officials agreed to rule out any change in policy rates. But that does not mean the April meeting will be uneventful: the FOMC will need to make some potentially important changes in policy communications. First, we expect Fed officials to acknowledge the recent poor activity data, but blame it mostly on transitory factors. Thus the statement should still posit that the economy is converging toward the dual mandate over time.”
“Second, we expect the FOMC to remove the language that transitioned from "patient" guidance to explicit data dependence in March. The statement may incorporate support for a "gradual normalization" of policy, but is very unlikely to explicitly rule out a June rate hike, even though the chance of liftoff then has become very low, in our view.”
“While we think these changes should produce a more dovish statement on net than in March, the market is far more dovish still....the market currently is not priced for a rate hike by the September meeting, let alone by June.”
“This presents a dilemma for the Fed: accommodate market expectations of an even later liftoff, or update their communications to nudge the market in the Fed's direction. Despite not wishing to repeat the taper tantrum, we expect the April statement to reflect more of the latter.”
“If our US Rates Strategists are correct that the market is likely to look past the April statement to the data this week and next, it would be an opportune time for the FOMC to complete the transition to a flexible, meeting-by-meeting policy stance. The risk is that the market is looking for the Fed to confirm an even more patient policy, and could be disappointed in light of the above discussion.”