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3 Main Themes To Watch In Next Week FOMC - BofA Merrill

First, there is a likely to still be a sense of caution hanging over the meeting, helping to justify why the Fed did not hike. The sharp tightening of financial conditions has started to ease and market nervousness over the global growth backdrop has abated, but we expect the FOMC statement will continue to state that the Committee is still closely monitoring global developments and will not reintroduce a balance of risks assessment. Similarly, uncertainty about the near-term inflation outlook – notably a drop in oil prices and inflation expectations, but a strong set of inflation data prints for February – also is likely to keep the Fed cautiously on hold for now.

Second, we look for some signs of optimism in the discussion of the outlook going forward, supporting additional hikes later this year. We expect the updated dot plot will show a median three hikes for this year (with a number at two hikes) and four for 2017. In this sense, not hiking in March is similar to last September’s “tactical delay” of liftoff. The opening paragraph of the statement and Yellen’s subsequent comments should note that the US data recently have shown improvement on net. April should remain a “live” meeting – likely noted by Yellen in her press conference.

Third, we do not expect significant changes to the Summary of Economic Projections (SEP), in line with a “tactical delay.” There may be some tweaking of the near-term forecasts: we see some chance of slightly lower 2016 GDP growth; a smaller chance of a slight upward revision to 2016 inflation rates. However, we see a high likelihood that the median long-run dot will decline to 3.25% and a good chance that the central tendency for the longer-run GDP growth rate will come down modestly, reflecting disappointing productivity growth over the past few years. We also see some chance that the longer-run unemployment rate projection could move slightly lower.

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