The Fed projections for GDP, released at their Sep 17th meeting have been pared-back slightly since June, from 2016 onwards, reflecting Fed’s the acknowledgement of global growth concerns that may eventually feed back into the US economy. However, the 2015 estimate for GDP growth has been increased to 2.1% vs 1.9% previously, expressing the Fed’s near term optimism. The unemployment rate is projected to come-off at a more rapid pace across all projected years, and PCE core inflation is projected to remain firmly anchored below 2% out to 2018. For the most part, the Fed sees a delayed impact out of recent global tensions and anticipates a firm employment market going forward, for the next several years.
Taking a look at the comparison below, it becomes evident that the Sep 17th Fed statement closely resembles the June’s. The verbiage is little changed and as previously mentioned, traders needed to look to the projections and press conference for anything new.
Fed’s Yellen has reinforced the notion that every upcoming meeting is “live”, and ripe for the first interest rate hike in the US since the financial collapse of 2008. The Oct 28th Fed meeting is not followed by a press conference and there are no economic projections along with the statement release. Due to this fact, it is widely speculated that it is not a likely candidate for the first hike, leaving only the Dec 16th Fed meeting as a rate lift candidate for the year of 2015. However, in the press conference Fed’s Yellen has explained that the Oct 28th Fed meeting remains an option for a hike and an accompanying ad-hoc press conference at that meeting can be scheduled if needed, as such the Fed Oct 28th meeting is not “off the table”.

Recent commentary out of the Fed since the Sep 18th meeting has been hawkish. Fed’s Yellen (Fed Chair Neutral), after some rumors of health concerns earlier this week, has reiterated that she expects a hike this year and that holding off too long, on the looming interest rate hike may lead to hurried tightening later. Fed’s Yellen also pointed out that she does not see the global economic situation having a significant impact on monetary policy. US Equity markets continue to come off, as global tensions mount and the timing of the rate lift-off nears. Markets have responded; the E-mini S&P trades 1873.00 offside 131pts from the 2011.00 highs earlier this month.

There has been a bevy of Fed speakers on the wires since the Sep 17th FOMC meeting, most of which have delivered commentary in the same vein as Fed’s Yellen. Fed’s Mester (2015 Voter, Hawk) alludes to the US being able to “deal with” an interest rate hike this year. Fed’s Williams (2015 Voter Dove) has seen economic data since the last fed meeting as upbeat and warns that the Oct Fed meeting is “live”, that a hike before the year’s end is likely, sees H2 growth for 2015 at 2.5%, above the Fed’s projected 2.0-2.3%, and inflation reaching 2% gradually. George (Non-Voter Hawk | 2016 Rotation) and Lockhardt (2015 Voter Dove) have explained that stock market fears and global economy impacts may be overblown, with Fed’s George, supporting a 2015 hike despite the aforementioned risks to the US outlook. Fed’s Lockhardt cautioned against inflation reaching target and hiking amidst the recent volatility, but also supports a 2015 hike. Fed’s Dudley (2015 Voter Dove) warned that H2 of 2015 might be worse than the first half but a hike later this year is likely. At large, most members are anticipating a hike before the year is out and have seemed to take a different tone than prior to the Sep 17th Fed meeting, discounting the global economic situation as a factor that may postpone the first hike.

Commentary from Fed Arch-Dove Evans (2015 Voter) is calling for a hike “later than projected” and suggests that a much more gradual pace of monetary tightening will take place in the future, where the Fed completes only three hikes by the end of 2016. The current Fed projections show a path wherein the fed completes five hikes by the end of 2016; two additional hikes than Fed’s Evans’ is alluding to.
Currently, there seems to be a disagreement between the Fed’s projections and the market’s expectations, as implied on the short end of the yield curve. The “long-run” rates remain a wide margin below the Fed’s projections. Though the Fed has brought-in their projections this time around, the market’s implied rates have slid substantially.

While a 2015 hike seems to be in the cards, as per recent commentary, it remains likely that the Fed will take a very gradual pace to any further tightening. This may result in some flattening on the US yield curve, on the whole, as safe haven flows continue to drive the long end.
Currently the markets are pricing in a 16% chance of a hike at the Oct 28th Fed meeting, and a 46% chance of a 25bps hike as the year comes to close. Markets seem to be discounting the odds of an Oct Fed hike. The Fed communications recently have served to actively manage expectations for the Oct meeting and highlighted that October remains a “live event” and traders may, after digesting some major data points this week, adjust their short-end bets accordingly.

This week traders will be looking to some key data points to help cement their opinions of whether or not the Oct meeting is as “live” as the Fed has suggested. The all-important Non-Farm Payrolls report arrives on Friday morning after being prepped by the related ADP report Wednesday morning. The manufacturing half of the dual ISM reports also comes out this week on Thursday, on the back of weak Philly Fed and Empire manufacturing readings. There remains a healthy amount of Fed speak over the rest of the week with some eagerly awaited commentary from Fed Chair Yellen on Wednesday, Williams on Thursday, Fischer on Friday, and Dudley on Saturday.

-David Felkai Uptick GMA.

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