Fed is widely expected to announce the start of balance sheet reduction - TDS

The Fed is widely expected to announce the start of balance sheet reduction at the September FOMC but there is nearly universal agreement that they will leave rates unchanged, according to analysts at TDS.

Key Quotes

“Our base-case is for the policy statement and press conference to convey a cautiously optimistic tone while the accompanying projection materials should reveal a downgrade to the long-run dot while leaving the median 2017 and 2018 dots unchanged. However, we believe the risks lean towards a more dovish outcome.”

“Rates: While we don’t expect an immediate market reaction, over time we expect term premium, 10yr nominal and real rates to rise, 5s30s to flatten, and 5yr swap spreads to tighten. We are more sanguine about the MBS basis.”

“FX: Market is likely to look past balance sheet reduction, focusing instead on a possible rejiggering of the dots and lower inflation profile, which likely will further ding the USD.”