FOMC Preview: No move; signal December

FEd's Chairwoman Janet YellenJanet Yellen

Barclays analysts commented on Wednesday:

Concerns that recent strains in financial markets may reflect greater weakness abroad than is apparent in available macroeconomic data are likely to stay the hand of the FOMC this week. The committee will also be concerned that beginning a tightening cycle could exacerbate extant fragility in financial markets, potentially destabilizing an increasingly tenuous economic and financial outlook across emerging Asia.

We expect Fed Chair Yellen to emphasize data-dependence and that every meeting remains “live,” but we believe concerns about external demand and inflation will delay hikes until March 2016.

The Summary of Economic Projections (SEP) is likely to show revisions to 2015 GDP growth (higher), 2016 growth (lower on stronger USD), the unemployment rate (lower), 2015 headline PCE inflation (markedly lower), the longer-run fed funds target rate (25bp lower), and we would not be surprised to see the longer-run unemployment rate, or NAIRU, fall to 4.8-5.2.

These changes to the outlook, along with a message of “not now, but likely soon,” will, in our view, lead the median policy path on the “dot chart” to fall 25bp relative to June, with the risk of a larger 50bp decline in 2017.