We expect a Fed taper but no change in guidance

Genevieve Signoret

Macro Views

Besides the FOMC statement on Wednesday, the Fed will release the updated forecasts of Fed presidents. Also, Janet Yellen will hold a press conference.

We expect the statement to announce a 10-billion-dollar asset-purchase-program taper to $15 bn/month.

We’ll be especially alert to any changes in the wording of the Fed’s forward guidance. Today that guidance reads:

The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

The key phrase that markets will be focused on is “for a considerable time”. We anticipate no change to that phrase or to the guidance overall. At the same time, we recognize that the risk of a change is rising.

When a change does come, it could trigger the type of severe, high-correlation volatility that we’ve been warning of now for several months.

Events in red are those most likely to shake markets.

Monday 15

• Turkey: Unemployment rate (Jun).
• Euro Area: Foreign trade (Jul).
• USA: Capacity utilization (Aug), industrial production (Aug). We’d like to have August’s data to better assess the pace of the recovery. Consensus:  capacity utilization, 79.3% (from 79.2% in Jul); industrial production, 0.3% month on month (from 0.4% in Jul).

Tuesday 16

• UK: Consumer prices (Aug).

Wednesday 17

• Euro Area: Consumer prices (Aug, final).
• UK: Unemployment rate (Jul), monetary policy meeting minutes (Sep 5). On September 5, the Bank of England (BoE) decided to leave unchanged its monetary policy rate and its asset purchase program. We’d like to know whether dissent against this position has risen since the last meeting.
• USA: Consumer prices (Aug), FOMC policy decision. See comments above. Consensus: consumer prices, 1.9% (from 2.0% in Aug); monetary policy decision, no change at 0.0–0.25%, no change in forward guidance.

Thursday 18

• Japan: Foreign trade (Aug).
• UK: Referendum on Scottish independence. The market has been reacting negatively to polls showing that the referendum vote will be much closer than long thought. Mark Carney, the governor of the BoE, has said that Scottish independence would be incompatible with a monetary union. Mr. Cameron, the British Prime Minister, has promised to empower the Scots. And banks in Scotland have threatened to move south. Opinion polls are showing the “no” vote slightly in the lead, but by a margin so slim that there’s no predicting the outcome.
• USA: Fed speech: Yellen. Janet Yellen, the Fed chair, will speak on “The Importance of Asset Building for Low and Middle Income Households” at the Corporation for Enterprise Development’s 2014 Assets Learning Conference (via prerecorded video).

Friday 19

• Mexico: GDP demand-side breakdown (Q2), monetary policy meeting minutes (Sep 5).  Some folks read a hawkish tilt in Banxico’s last communiqué. We did not. We think that the statement’s mention of a deteriorating balance of risks for near-term inflation, the Governing Board was merely trying to keep market expectations tame given a transitory inflation spike. We continue to forecast a 3.00 Banxico policy rate for the next two years. We look to these minutes to confirm or refute these views.

Saturday 20

• Australia:  G20 finance ministers and central bank governors meet in Cairns, Australia.