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Fed: Thoughts on the “Dot-Plot” - RBS

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 15, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at RBS, suggests that with most market participants considering a rate hike at this week’s FOMC meeting all but inevitable, focus has shifted squarely to expectations for the post-liftoff path.

    Key Quotes

    “Against this backdrop, there will be considerable attention on any changes to FOMC members’ assessment for the “appropriate” level of the Federal Funds rate in this week’s Summary of Economic Projections (SEP). In this note we discuss our expectation for those changes and address several other questions to consider with regards to the “dot-plot”.

    What changes to the path are we expecting?

    In the near term, we expect the median projection in the dot plot to remain nearly identical to the previous edition published in September. We look for the median dot to hold at 0.38% in 2015 and to remain at 1.38% in 2016 (100bps in hikes, or one at every other FOMC meeting). In this base-case scenario, the trimmed-mean would slip by only around 2 bps in 2016.

    However, we are expecting the “depth” of the median level in 2016 to increase somewhat with 4 participants expecting 5 hikes by the end of 2016. This is one reason we find a decline in the 2016 median to be highly unlikely, as it would take 3 of these members surprising us to the downside to knock the median below 1.38%. Even ignoring our December assumptions and looking just at the September dots, even if all four participants who expected four rate increases by YE 2016 were to shift that number down to three hikes, the median 2016 dot would still remain at 1.38%.

    In 2017, we expect the median dot holds at 2.63%, implying five hikes in 2017. In 2018, we see the median remaining at 3.38%, implying roughly three hikes that year. For the longer-run dots, we expect they will continue edging lower, so that the median level may fall by another 25 basis points, to 3.25%. This would be consistent with recent research mentioned by key Fed officials that the longer-term “neutral real rate” is likely to adjust more gradually, and to a lower level, than in the past

    We’ve had strong employment data, a reduction in the international tail risks cited inSeptember, less expected drag from the USD following the ECB decision, and stable core inflation readings. The one potential weak spot has been manufacturing, but we don’t believe this will be enough to cause a significant number of participants to reduce the number of expected hikes. It’s possible that there has been some decline in individual members’ views of the neutral rate, but again, not widespread enough to cause a serious flattening of the path

    We think five hikes in 2016 and three hikes in 2017 is consistent with the committee’s expectation of a “gradual path.” However, there seems to be a considerable schism between the FOMC’s definition of a “gradual path” and the market’s. The path we are expecting in the December SEP certainly has the potential to disappoint the latter.”



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