We expect the Fed to maintain the target range at 0.25-0.50% in line with both consensus and market pricing. As there is no press conference nor updated projections, focus is on the statement. We anticipate the Fed to maintain that 'global economic and financial developments continue to pose risks', which was included in the statement in March. Although financial stress has eased and we have seen stabilisation in China, we think the dovish members are likely to maintain their cautious approach. Especially it is worth noting that Fed chair Yellen emphasised the downside risks to the economy in her last speech, when she made it clear who is in charge of the Fed.
The big question is whether the Fed will keep the door open for a June hike or not. Given that the pickup in core inflation has not 'proved durable' and growth slowed in Q1, it is too early for the Fed to say that 'risks are nearly balanced', thereby implicitly closing the door for a June hike, in our view. Our main scenario is that the Fed stays on hold until September and only hikes once this year. We continue to believe that the Fed is unlikely to risk tightening too much, too quickly and it would rather postpone the hike further than tighten prematurely.
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