Summary of Street Expectations for Fed Tapering

Ben Bernanke

What will the Fed do today? Your guess is as good as mine, but let’s take a look at what the Street is anticipating.

BofA/Merrill: See tapering decision as a close call, base case is it starts at the December meeting. If it does come in Sept, they expect a modest $10-15bn cut, supplemented by aggressively dovish guidance topspin. Expect market to focus on the new fed funds forecasts for 2016, which could indicate how fast the Fed intends to raise rates.

Barclays: Do not see the size of tapering as the main driver of markets, unless it is very far from the consensus forecasts of $10bn. Expect weakness should we see $15bn come out. Expect forward guidance, FOMC’s fed fund forecasts and the tone of answers in the press conference to matter much more. For rates to rally significantly from current levels, they think the Fed would need to change its forward guidance and lower the UER threshold, which they see as very unlikely.

Credit Suisse: Taper of $20bn. MBS and Tsy purchases cut by $10bn each, failing this they expect an initial taper of $15bn, a $5bn cutback in MBS purchases and $10bn in Treasuries. Expect the FOMC to insist that short-term interest rates remain anchored near zero for a long time, even after net asset purchases have ended. Suggest the FOMC may say that the new level of purchases announced may be adequate for a longer time, removing expectation for a further taper in October. On SEPs, expect 2016 to show very little appetite for rate raising.

Deutsche Bank: Tapering is priced in. Suggest size and composition should have a minimal impact on rates, so long as it is not materially delayed. Soft payrolls has led many to expect a tapering-light and a strengthening of the forward guidance, e.g. by lowering the unemployment rate threshold to 6%. See the Fed as unlikely to meet rising expectations of a material and credible strengthening of the forward guidance.

Goldman Sachs: Taper of $10bn, all in treasuries. No MBS. Fed leadership probably views MBS purchases as more effective in boosting economic activity than Tsy purchases. No significant change in forward guidance for QE, though they look for a strengthening of the forward guidance for the Fed Funds rate. They expect the statement to make the 6.5% u/e threshold conditional on a return of inflation to the 2% target.

HSBC: Look for $15bn reduction ($10bn in Tsys, $5bn in MBS). Suggest the market has already adjusted to the end of QE. Fed will look to send a dovish signal to the markets. On SEPs, suggest a median projection of a 2% 2016 funds rate would be dovish, and a 2.5% hawkish.

JP Morgan: Expect $15bn to be announced ($10bn Treasuries/$5bn MBS) which looks close to market expectations. A downside surprise (Fed hawk George is on the record as supporting 15bn) could move yields lower, while a shift in composition towards greater Treasury / less MBS tapering could push yields higher. The Fed’s communication about the anticipated end of QE3 (right now mid-2014 is the expectation) could also push yields in either direction. On SEPs, look for Fed Funds around 2.25%, this is close to current market pricing but below fair value including term premium.

Morgan Stanley: Expect the Fed to moderately dial back accommodation this month ($10bn in UST and $5bn in MBS). They believe that most Fed watchers underestimate the signaling effect of a decision not to taper in September. A decision not to taper this month could signal a more prolonged purchase plan and a more cautious outlook for the economy.

RBS: Look for $20bn cut, split between treasuries and MBS, taking purchases to $65bn per month. Recognize the Fed may go for a smaller cut, particularly given the disappointing August employment report. See very low likelihood of and moves in u/e thresholds in relation to rate hikes. Expect the Fed to use SEPs to reinforce lower for longer. In particularly, using the new 2016 forecast to reinforce the message that tightening, once it begins, will be gradual.

UBS: Look for a gradual move, reduced by $10bn, with $7bn reduction in Tsys and $3bn in MBS. Maintain forward guidance, though see some chance that u/e threshold is lowered slightly to 6.25%. Fed to maintain language that the next step could be up or down. Bernanke in press conference, may back away from 7% u/e threshold for lowering purchases.

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