* The weak trend in job growth over the past three months coupled with what appears to be a general loss of momentum in economic activity recently has shifted our expectation for the start of tapering to early next year, most likely at the March meeting.
* We expect the FOMC statement released Wednesday 30 October to strike a more downbeat tone on the current economic situation than in September. Furthermore, the forward-looking part of the statement is likely to highlight increased uncertainty over the economic outlook for next year, although the easing in financial conditions since the September meeting is likely to be
acknowledged.
* We do not expect any policy changes but a dovish tone. Markets have already pushed expectations for a first rate hike to Q4 15 and we think it will be difficult to push them further out, even with a dovish Fed.
* The minutes from the September meeting showed that FOMC participants discussed ways to clarify their view that asset purchases and Fed funds rate hikes are two separate things. Judging from the increase in yields and the repricing of the first Fed funds rate hike following Bernanke’s comments that asset purchases could come to an end next year, markets continue to link the two issues together. One step discussed was to strengthen the forward guidance on the Fed funds rate and a measure that has been mentioned is to adopt a lower threshold value for inflation on top of the 6.5% threshold for unemployment. However, we think it makes sense to introduce this additional forward guidance at the meeting when tapering is announced and not before, especially taking into
account the current dovish market pricing of the first rate hike.
* Finally, remember that the statement will be released at 19:00 CET as daylight savings time does not end until next week in the US. There will be no press conference or updated economic projections at the meeting.
Danske Bank
