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TD: FOMC's Projections Are A Bit Too Optimistic

FED
  • TD saw the Fed as striking a dovish tone at the September FOMC, but "held off on sending a clear signal on how much above 2% inflation needs to be to trigger tightening, suggested there were no plans for additional changes to forward guidance, and did not suggest that changes to the QE program to make it more accommodative are imminent." As such, the overall message was modestly less dovish than TD anticipated.
  • While TD doesn't anticipate significant further changes to fwd guidance "anytime soon", they see "a high chance" of a change in QE composition in the months ahead to make the program "more accommodative". The case for a QE shift "would likely strengthen if growth slows more than assumed in officials' projections over the rest of this year. We think the projections are a bit too optimistic."
  • That said, "we believe that it will take a deterioration in the economic trajectory, an undershooting of the Fed's projections, or a tightening in financial conditions (via a rise in rates) for the Fed to make any adjustments to their QE program", even though "the market may test the Fed in coming months as Treasury continues to ramp up supply".
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