Rate Change Unlikely but Fed's Statement Will Be Scrutinized

In the current edition of Morgan Stanley's Global Economic Forum Ted Wieseman analyzes this week's FOMC meeting:

Focus in the coming week will be on the FOMC meeting Tuesday and Wednesday.  Any actual change in rates seems very unlikely (and the market is now priced that way after seeing a risk of a hike a week ago), but the statement released Wednesday will be closely scrutinized to see to what extent it validates the market’s expectations for a series of rate hikes starting no later than the September FOMC meeting.  We think that the statement may be tweaked somewhat to raise concerns about inflation and possibly indicate lesser fears about downside risks to economic growth.  We’re not expecting any major shifts in the language, however, and we do not expect the statement to validate the pricing still of a significant risk of a rate hike at the following FOMC meeting on August 5. 

The market will have to take down a lot of supply in the day’s surrounding the FOMC meeting, with a US$30 billion 2-year auction Tuesday and US$20 billion 5-year Thursday.  Although we’re coming into this heavy supply with a much better tone after the past week’s bounce, this much greater issuance could still prove tough to swallow.  The market has taken a significant hit each of the past three months during the week of 2-year and 5-year issuance.