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Key Events In The Coming "Most Important FOMC Decision Ever" Week

The title does give it away: the only event that everyone will be focusing on this week will be the Fed's announcement and Yellen's press conference on Thursday. Here is what else is on deck.

  • Turning to this week’s calendar now. It’s a fairly quiet start to the week today with just Euro area industrial production and Italian CPI, with no data due out in the US this afternoon.
  • It’s busier on Tuesday however with French and UK CPI (along with RPI and PPI in the latter), followed closely by the Euro area employment and trade data along with the German ZEW survey reading for September. That’s before a bumper data session in the US on Tuesday with retail sales, empire manufacturing, industrial and manufacturing production, capacity utilization and business inventories all due.
  • In Europe on Wednesday all eyes will be on the Euro area CPI print, while UK employment indicators are also expected. In the US the focus will be on the August CPI print in what’s set to be the last important data print prior to the FOMC meeting. Average weekly earnings data and the NAHB housing market index are also due Wednesday.
  • We start in Japan on Thursday with trade data before we get UK retail sales closer to home. Prior to the FOMC decision in the early evening and subsequent Yellen press conference we’ll get US housing starts, building permits, initial jobless claims and Philadelphia Fed business outlook readings ahead of the main event.
  • Ending the week on Friday in Asia will be property prices data out of China. In Europe we’ll get French wage data before the conference board leading indicators out of the US in the afternoon.

And here is BofA's preview of the main event:

Game Day Decision

 

As we have noted, the September FOMC meeting remains a very close call. Our base case is that the Fed begins a very gradual normalization process by hiking 25bp in response to the cumulative improvement in the economy, particularly the labor market. However, the decision likely will depend on market conditions into the September 16 and 17 meeting. Thus, recent financial market volatility and global growth uncertainties could lead the FOMC to temporarily postpone hiking. In that case, we would expect the Committee to keep the October meeting “live” as a potential date for liftoff.

 

If September is a go

 

In our base case the FOMC hikes in September, citing the improvement in the outlook and narrowing slack. The expectation of both a tightening labor market and fading global disinflationary factors should allow the Committee to be “reasonably confident” that inflation will gradually return to target. Although the Committee should note that significant accommodation remains after the first hike, we don't expect an especially dovish message in conjunction with liftoff: the Fed wouldn't starting hiking if it didn't think the economy was likely to continue to improve and warrant subsequent rate increases over time. This will not be a “one-and-done” hiking cycle. We see a decent chance that Chicago’s Evans would dissent on a September rate hike.

 

Separating policy from plumbing

 

If the Fed raises rates in September, it will also release an “implementation note” as laid out in the June minutes. This document will contain the domestic policy directive to the Desk in New York. Importantly, it could be updated between meetings to allow for changes in the use of various tools to support the Committee's objectives without being erroneously interpreted as a change in policy stance.

 

If September is a pass

 

We do see a significant chance that the FOMC will take a tactical decision not to hike in September, should market stress remain elevated. In this case, we would expect the FOMC to note that economic conditions could soon warrant starting to scale back some of the extraordinary accommodation in place — perhaps within the next few meetings — but that market or international factors justify caution at this time. In this event, we would expect that October would very much remain an option for hiking rates. The FOMC could convene a press conference on short notice, or could pre-announce one or more press conferences at future meetings during the September one. There is some chance that Richmond’s Lacker dissents in the absence of a September hike.

Finally, here is the summary table:

Source: Bank of America, Deutsche Bank