FOMC: Dovish hike seems widely expected - BBH

The US dollar is narrowly mixed ahead of the FOMC meeting, where a dovish hike seems widely expected and the market has practically fully discounted a 25 bp hike in the Fed funds target range today, according to the analysts at BBH.  

Key Quotes

“Investors are more interested in the forward guidance rather the rate move itself.  In some ways, Governor Brainard framed the issue recently.  Economic growth and prices may be disappointing, and this may make officials cautious about continuing to normalize policy.  On the other hand, financial conditions are looser than the Fed deems appropriate.  They have wanted to remove accommodation, but a wide range of rates are lower, the stock market is higher, and the dollar is weaker.”

“However, before reaching the conclusion that monetary policy is not effective, investors and policymakers will likely keep in mind that such policy acts with unpredictable and variable lags.  It was slow to take effect in the depths of the crisis, and it is slow to take effect on the other side.  Yellen will likely stress the data dependency of the FOMC.  It seems that the potential need for a tactical adjustment is possible precisely because Fed policy is not dictated by some rule-based system.  Bloomberg and the CME calculations show a little less than a 40% chance of another hike this year.”

“Investors are also looking for more details about the Fed's balance sheet strategy.  Such information is more likely to be found during Yellen's press conference rather than the FOMC statement.  The general thrust of the Fed's strategy is to begin slowly to cap the reinvestment of maturing funds and gradually ratchet it up.  The Fed funds rate will remain the primary tool of monetary policy.  The inclination is to include both Treasuries and MBS in the program.  The program may begin before the Fed decides the terminal size of the balance sheet.”