UBS Sees Stronger Fwd Guidance, QE Maturity Extension At This Week's FOMC

UBS has the most aggressive call among sell-side analysts re Fed actions at this week's meeting: they expect the FOMC to adopt formal, outcome-based fwd guidance, and to change gears on QE policy.

According to UBS, if the FOMC does not follow up their change in words with a change in actions, it could severely undermine the messaging of their commitment to the new strategy. Communication from many FOMC participants just before the blackout period, however, showed little urgency in adjusting forward guidance. Powell can easily get the Committee there, but the outcome is far from assured.

Re fwd guidance: UBS says the Fed will commit to holding the target rate at the ZLB until the FOMC's forecast for inflation one year forward is "at or above" 2¼%. They will want to phrase the commitment in terms of achieving full employment and the overshoot.

Re asset purchases: the Fed will also extend the maturity of Tsy purchases to 5 years and longer (no point buying <=5 with short end pinned down), but also slow from the current $80bln/month, in a shift from 'market functioning' to providing accommodation (while acknowledging concern about the balance sheet growing too big too fast).