Flash: Trust in the Fed’s “words” diminishing?- RBS

FXStreet (Guatemala) - Strategists at RBS noted that the FOMC decision on Wednesday will include a statement, new forecasts for the economy and the Fed Funds rate, and Chair Yellen's first post-decision press conference.

Key Quotes:

“Our house view is that the Fed updates the forward guidance language to a more qualitative guidance based on a variety of labour market indicators, instead of just the unemployment rate”.

“With regards to asset purchases, we anticipate a $10bn at the March meeting is well priced and the bar to change the pace of tapering is quite high. The Fed's forecast profile is unlikely to change meaningfully”.

“The most notable forecast will likely be the long-term Fed funds rate, which we expect to be lowered. We expect over time FX market focus will move away from the Fed's message being the driver of policy and toward one where the market's collective trust of the Fed's outlook drives the USD”.

“With inflation still well contained, that transition away from message to credibility of message may not manifest itself at Wednesday's meeting, but the risk that the market prices in an increased likelihood that the FOMC's core dovish message is no longer accurate. This is a hawkish risk we expect to manifest itself as the year progresses”.