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Fed preview: Rates to go up 25bp but some anxiety over press conference warranted - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 16, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at ING, suggests that the markets are as near certain about the first 25bp rate hike in this cycle as is ever the case.

    Key Quotes

    “The data has been supportive recently, and there has been little, if any, commentary from Fed speakers introducing any sense that this is not already a done deal. But there is still scope for markets to react on the day. As Yellen has been keen to stress in previous meetings, the timing of the first hike is less important than what happens thereafter, so what is likely to be key at this meeting, is the message Yellen delivers about the pace and extent of tightening that is to follow. We outline what we see as the four plausible scenarios, with some rough subjective probabilities (though we see two of these as very unlikely).

    Scenario 1: Most likely (say 70% probability)

    The Fed hikes the target range from 0-25bp to 25-50bp, and Janet Yellen stresses that “..economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run”. This is the text used in the last statement, and one that Yellen often repeats in the subsequent press briefing.

    But this is anything but a “slam-dunk” press conference, and there are one or two pitfalls that may trip up hopes for such a “dovish hike”. The most obvious of these is the “dot-diagram, and this takes us to scenario 2.

    Scenario 2: Hawkish interpretation (say 20% probability)

    Although we cannot imagine that Janet Yellen intends to give a hawkish press briefing, these are not easy events to stage manage, and a slight miscommunication, or imbalance in emphasis can lead to substantial market reactions, especially in thin, end of year markets. There is also a decent possibility that some of the more hawkish submitters of dots will scale back their claims, now that rates finally seem to be about to rise. But any outlier revisions may have little or no impact on the median.

    Scenario 3: 25bp hike, ‘One and done’ (say 5% probability)

    We cannot, in all honesty imagine a scenario where Janet Yellen would purposefully deliver a press briefing with the intention of pushing the “one and done” argument. But that is not to say that a clever journalist might not be able to put words in her mouth, or at least, elicit a non-denial of such an outcome. Our subjective probability in the table is 5%, though if pushed, we would put it much lower, though at the risk of suggesting spurious scientific accuracy. Markets are priced for modest tightening, so this would be a marked deviation from expectations, and would be a very dovish departure.

    Scenario 4: No hike (say 5% probability)

    It would seem very strange, given the hints of a rate hike, and lack of press leaks to suggest that nothing is actually going to happen, that the Fed is not now on course to deliver a 25bp rate hike. But never say never. Perhaps this no-hike scenario might also encompass a 12.5bp hike, which was a suggestion at the September meeting, when the markets were split on a rate hike and the Fed did nothing. Either way, the message this would likely send, as it did in September, is that the Fed was unconvinced by the strength in the economy, and markets would aggressively switch to a risk off mode.”
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