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Markets expect strongly dovish message from Fed in Oct meet - BAML

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Oct 26, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at BAML, suggest that for the October FOMC meeting, markets and the Fed are reasonably well aligned: markets do not appear to expect the Fed to hike, and in our view the Fed will stand pat.

    Key Quotes

    “However, market pricing diverges sharply from Fed communications thereafter. As the Chart of the Day shows, the market is now not pricing the first Fed rate hike until well into 2016. Fed officials, on the other hand, continue to characterize every upcoming meeting as “live,” and the vast majority still seems to favor hiking in 2015 based on speeches and the dot plot.”

    “As a result, language changes to the October FOMC statement, while likely not substantial, should lean in the direction of allowing the Fed maximum flexibility. Market participants expect a strongly dovish message from the October meeting, they may be disappointed.”

    “There are two potential paths the Fed can go down at the October meeting: start to signal that they are capitulating on rate hikes this year, or remain cautious optimistic for liftoff in December. We expect the latter.”

    “How they characterize the recent data and the global and financial risks will be the most likely signs of which path they are leaning towards. The challenge for the Fed is that while the global backdrop is not as disconcerting as it was back in September—helped along by further easing by the PBoC and a dovish assessment of policy options from the ECB—the US data have been more mixed.”

    “However, most of the weakness has been in globally-exposed sectors like manufacturing; meanwhile services, housing and many consumer and labor-market indicators are still pointing in a positive direction. We expect the Fed to lean in the direction of keeping December liftoff an option, and that remains our modal forecast for the first rate hike—even though the likelihood of liftoff at any specific upcoming meeting remains below 50%, in our view.”
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