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Friday, October 24, 2014

Merrill Lynch: FOMC Preview

by Calculated Risk on 10/24/2014 08:50:00 PM

From Merrill Lynch:

The October FOMC meeting is likely to see the end of QE3 buying, as the Fed tapers the final $15bn in asset purchases. ... Tapering has been largely contingent on an improving labor market, and that has generally continued. The FOMC also has indicated multiple times that they are likely to end QE3 in October. Thus, it would take a significant adverse shock to change that plan, in our view.

As for the statement language, we expect the “significant underutilization” language to once again remain in place — although we see a modest chance that is downgraded, say to “elevated underutilization.” Meanwhile, the likelihood of changing the “considerable time” language is much more evenly split. Our base case remains no change in October, largely because there is no urgent need to revise, especially with the increase in downside risks to the outlook and heightened market volatility since the last meeting. However, there is general dissatisfaction on the FOMC with this phrase, and Fed officials have had another month and a half to consider alternatives. With no press conference scheduled after this meeting, the Committee may opt for re-examining the forward guidance language more comprehensively at their December meeting.

Perhaps most notable at this meeting may be the number and nature of dissents. We see a high probability of hawkish dissents from Dallas’s Fisher and Philadelphia’s Plosser. In our view, there is some chance the FOMC statement will note a bit more concern about downside risks to inflation — a reflection of recent data, the drop in breakevens, the strong US dollar, and disinflationary forces abroad. Should the Committee opt not to add such language, a dovish dissent from Minneapolis’s Kocherlakota becomes a risk. ... We continue to recommend focusing on the statement language and prepared remarks from Chair Yellen and other key Fed officials to understand the views of the majority of voters, who favor a patient and gradual exit process.
I'll post a preview this weekend, but it seems QE3 will end ... and the FOMC statement will be shorter!