FOMC preview - RBS

By | Updated July 30, 2014 AAA

FXStreet (Bali) - Brian Daingerfield and Paul Robson, FX Strategists at RBS, share their views on Wednesday's FOMC, noting that no major shifts in policy are expected.

Key Quotes

"We have long felt, and continue to feel, that a change in Fed guidance and a challenge to its ability to stay credibly dovish will eventually merit a sustained uptrend in the USD. Despite recent improvements in the economic data, we simply do not feel that the FOMC will give an overt signal that their thinking is drifting in that direction at their meeting tomorrow."

"The Fed’s preferred measure of inflation, the core PCE deflator, remains well below target even as the core CPI rose to 2.0% in May. Importantly, Fed Chair Yellen has previously signaled that she sees the risks to inflation favouring inflation holding below target even as the economy recovers. Unlike the Bank of England, which showed an increased concern about rising housing market imbalances, the US Fed is more concerned about the recent stagnation in housing market activity."

"The FOMC may ultimately have to adjust its signaling language to put a greater emphasis on the slow pace and lower neutral level of the Fed Funds rate while simultaneously acknowledging that the lift-off may have to begin sooner. This “slower (rate hikes) for longer” rate hike guidance may one day replace “lower for longer”."

"In both cases, central bank dovish guidance may become more difficult to defend as the economy continues to recover. In any event, September appears a more fertile ground to plant those seeds, as it coincides with the final press conference meeting before the taper is currently expected to end. With that in mind, the late-August Jackson Hole speech may be a signaling ground for a guidance update, of course assuming that economic conditions do not vastly deteriorate during the interim."

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