Fed: Welcome distraction this week – Deutsche Bank

Analysts at Deutsche Bank suggest that the markets were feeling a little indecisive last week given the unpredictable spate of headlines which seemed to come from the White House on an almost daily basis then there’s good news as we have the welcome distraction of a Fed meeting this week.

Key Quotes

“Indeed, Wednesday’s meeting is the focal point for markets over the next five days – not least because it is Fed Chair Powell’s debut - although there are a few other potentially interesting events for us to look forward to including today’s two-day G20 meeting of finance ministers and central bankers, the conclusion of China’s NPC tomorrow, the global flash PMIs and UK/EU summit on Thursday and yet another US government funding deadline due up on Friday. So, plenty to keep markets interested.”

“In terms of the Fed, the consensus view amongst economists is for a 25bp rate hike and that’s reflected in the market with fed funds contracts fully pricing that in. With that likely as good as done our US economists believe that there are three key questions going into the meeting that we should be asking. The first is: does the committee still see risks as “roughly balanced”. The second is: will the median dots move up, and in particular, will they signal four rate hikes this year. The third is: how will the new chairman perform in the press conference, and what changes in style/messaging might he signal?”

“In summary, the team expect the answer to the first question to be that the Committee sounds a bit more upbeat (though not yet worried) about inflation developments, and a message on economic activity that is little changed. They also expect the Committee to raise growth forecasts and lower unemployment forecasts. In terms of the second question, their view is that we see the median dot move to 4 hikes from 3. However, this is likely to be a close call. Perhaps of more interest will be the terminal rate though. The team expect the terminal rate forecast to rise to 3.3% in 2020 from 3.1% in the December forecast. As for the third question and Fed Chair Powell’s press conference, on substance, they expect Powell’s message to centre on the signs of an overheating economy, and that the Fed’s current tightening action is clearly in order. This would signal that another rate hike is on the way in June.”