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26 Jan 2015
January FOMC meeting likely to be quiet – BAML
FXStreet (Barcelona) - The Bank of America-Merrill Lynch Team previews the FOMC meeting later this week, expecting that the meeting will likely be quiet and will lack any forecast updates.
Key Quotes
“The January FOMC meeting is likely to be quiet on the surface - a notable break from the nearly non-stop action by other central banks recently. There will not be any forecast updates or a press conference at this meeting.”
“However, beneath the surface there are significant debates about the economic conditions that would warrant tightening and how to convey those through the guidance language. These debates should be revealed in the minutes (in three weeks' time). Hence, we expect few changes in the statement at this month's meeting; the most likely would be to finally remove the "considerable time" language and retain a "patient" approach to policy. The December FOMC statement and minutes made clear that these two phrases were equivalent in the minds of most Fed officials. Thus, we do not expect a market reaction from dropping that now-redundant sentence.”
“In December, the FOMC dropped language that asserted the risk of "persistently below" target inflation had "diminished somewhat," and instead said that they will "monitor inflation developments closely." We expect this sentence to remain in January, buying the FOMC time to collect more data and reconsider the inflation outlook in March. However, we do see some chance that the statement will incorporate more dovish language about ensuring the Fed will reach its medium-run target.”
“Despite the FOMC looking past "market-based measures of inflation compensation" to date, the Chart of the Day reveals their persistent decline. 5y5y-forward breakevens in the US fell another 23bp after the December Fed meeting. In contrast, European breakevens are up slightly over the same period, responding positively to ECB easing.”
“The drop in US breakevens raises questions about the longer-run ability of the Fed to reach its 2% inflation target.”
Key Quotes
“The January FOMC meeting is likely to be quiet on the surface - a notable break from the nearly non-stop action by other central banks recently. There will not be any forecast updates or a press conference at this meeting.”
“However, beneath the surface there are significant debates about the economic conditions that would warrant tightening and how to convey those through the guidance language. These debates should be revealed in the minutes (in three weeks' time). Hence, we expect few changes in the statement at this month's meeting; the most likely would be to finally remove the "considerable time" language and retain a "patient" approach to policy. The December FOMC statement and minutes made clear that these two phrases were equivalent in the minds of most Fed officials. Thus, we do not expect a market reaction from dropping that now-redundant sentence.”
“In December, the FOMC dropped language that asserted the risk of "persistently below" target inflation had "diminished somewhat," and instead said that they will "monitor inflation developments closely." We expect this sentence to remain in January, buying the FOMC time to collect more data and reconsider the inflation outlook in March. However, we do see some chance that the statement will incorporate more dovish language about ensuring the Fed will reach its medium-run target.”
“Despite the FOMC looking past "market-based measures of inflation compensation" to date, the Chart of the Day reveals their persistent decline. 5y5y-forward breakevens in the US fell another 23bp after the December Fed meeting. In contrast, European breakevens are up slightly over the same period, responding positively to ECB easing.”
“The drop in US breakevens raises questions about the longer-run ability of the Fed to reach its 2% inflation target.”