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Research Note: Sept. 23 FOMC Meeting
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Summary outlook: On Wednesday, Sept. 23 at 1415EDT/1815GMT, the FOMC is unanimously expected to announce an unchanged interest rate decision, holding the Fed Funds Target Rate at 0.00-0.25%. We expect that the Fed will retain the language indicating rates are to remain on hold ("...exceptionally low levels of the federal funds rate for an extended period.") Any market reaction will be based on the Fed's updated outlook on the economy and any changes to its asset purchase programs. On the economy, we expect the Fed to upgrade slightly its current assessment, but remain cautious on the outlook in light of significant weakness in employment and consumer spending, among other soft spots.
On the asset purchase programs, our primary scenario sees no change to the existing programs, leaving the risks that the Fed either decides to cut short its Agency debt purchases or expand those Agency debt purchases and/or Treasury debt purchases. If the Fed makes no change to the asset purchases, we would anticipate minimal rates or FX reaction. If the Fed were to curtail its Agency debt buying, we would expect yields to shoot higher, and the USD to follow suit, especially against the JPY. If the Fed were to expand any of its asset buying, we would expect rates to drop and the USD to fall across the board.
Trading strategy: Our primary scenario sees a largely status quo FOMC decision, with some potential for a slight improvement in the economic assessment, and no change to the Fed's asset buying plans. If an improved outlook is noted, risk assets may see some further gains in response, which would likely be supportive for JPY-crosses (AUD/JPY, NZD/JPY, EUR/JPY, etc.) and negative for the USD, except against the JPY. However, given that risk markets are at/near recent highs, we will be on heightened alert for a short-term failure, in light of an 'as expected' outcome (buy the rumor/sell the fact). If risk assets and JPY-crosses have moved higher in advance of the FOMC announcement, we will be especially vigilant.
Economic analysis: Consensus is unanimous that the Fed will leave rates unchanged at the current 0.00% to 0.25% range and thus the focus will once again be on the communique. In terms of the economy, the committee is likely to repeat its prior assessment that activity continues to level out. They are likely to give a nod to improving conditions in the financials space while acknowledging that household spending and employment remain weak. We also think they will not veer much from their inflation assessment. In other words, they will note the increase in energy prices and bottoming out in the annual rate of CPI but will remain optimistic that price pressures are muted at present.
The key in the statement will be the musings with regards to the Fed debt purchase programs. The bank has purchased 95% of the proposed Treasury purchases and is about 2/3 of the way through in their Agency and Agency MBS purchases. The Fed is expected to let the Treasury program expire in October but the MBS purchases, which have helped keep the mortgage and housing market from imploding, remain an open question. In the prior press release the committee said that they "will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets". If they leave that line in and say no more about the matter, we expect this to be a non-event. However, if they allude to expanding the MBS program or cutting it short (on the back of an improving economy) we could see some sharp volatility in rates. Expanding the program would see rates trade lower and put pressure on the yen crosses - which have been exceptionally correlated with US yields. Deciding to cut it short would have the opposite impact.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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