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Citi Preview: Hawkish Risk From Still-Dovish Fed

FED

The risks for the Dec FOMC skew hawkish per Citi, "as a still-very-accommodative Fed may disappoint some market participants who expect ever-easier policy".

  • Citi sees "only" 25% chance of an extension of Tsy purchase duration, with the FOMC delivering qualitative guidance on asset purchase. More specifically: to say purchases will continue at least at the current pace until pandemic-related economic risks have "substantially receded", and progress toward the dual mandate is met - similar but less strict to fwd guidance on rate hike.
  • A less likely but possible alternative would be an increased pace of purchases. An unlikely but very dovish option would be to extend duration AND increase purchase pace.
  • The exact wording of asset purchase guidance will be contentious and could generate dissents. Citi: "Any stronger indication of the eventual tapering of asset purchases would be hawkish."
  • In the Dot Plot: 2-3 dots to bring first rate hike earlier, i.e. 2023 or earlier liftoff, which would be ever-so-slightly hawkish.
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