The FOMC statement this week will be under much closer scrutiny than would have been expected a week ago. In this regard, Citibank outlines the following dovish/hawkish risks in the FOMC statement on Wednesday:
Risks on the dovish side (from most to least): 1. Indication that the tapering timetable has changed 2. An explicit drop in the threshold unemployment rate 3. An explicit Inflation floor 4. Concern that economic activity is not meeting expectations5. Indication that government bond yields are still too high given the likely path of Fed policy
Risks on the hawkish Fed (from most hawkish to least): 1. Explicit reference to the tapering timetable 2. Little or no material change from the last statement 3. Reference to financial market froth 4. More optimistic language on labor market than in last statement – “Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months …The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.”
Given that, what is Citi's base case for this coming FOMC statement?
"Our economists do not expect much change in direction from the last FOMC and subsequent guidance so there is a risk that expectations will be disappointed. On the whole we think that the Fed has given all the signals it is likely to give, so the risk is weighted small towards the Statement being a bit of a damp squib," Citi answers.
And how the USD will likely react to such an FOMC outcome?
"For FX we see USD as trading neutral to slightly stronger. There may be modest disappointment that the run-up of dovish comments to FOMC was better than the reality, but we see little motivation for either extreme hawkishness or dovishness," Citi projects.
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