Fed: January Expectations

Published on January 28, 2015

We have gotten quite a few incoming phone calls asking whether the Federal Open Market Committee statement in a few hours will turn distinctly more dovish and indicate a rate lift-off is being “pushed back” to, whenever‎.

We think the very likely short answer is‎ no, or to be more precise, pushed back to exactly when?

*** We do think for all practical purposes a June meeting rates lift-off is not a high probability, with the slippage to September ‎being far more likely, as we wrote previously (SGH 1/7/15, “Fed: Two out of Three Ain’t Bad”), but we suspect the Committee majority still wants to keep their June meeting as an option for the anticipated rates ‎lift-off. In that sense, there is no advantage to the FOMC to send any explicit change in messaging in this statement for a projected rate hike being pushed back even later than that into late this year or next. On that point, this Friday’s ECI numbers will go a long way to setting the tone to the Fed’s messaging in the run towards the March meeting.

*** We do expect the meeting will have been dominated by the discussions to shape a communications strategy for the run up to a rate lift-off and as importantly the most likely pace of the tightening trajectory, none of which is likely get to enough of a consensus to drive the messaging takeaways of today’s statement. We instead expect the FOMC’s January statement to look and feel a lot like the October meeting statement; a way-station to the more crucial meeting that will follow, with glimpses into the Committee thinking to be drawn from the Minutes in mid-February.‎

*** The FOMC is very likely to remain reasonably upbeat on the outlook in the first two descriptive paragraphs on the economy. Some of the data since the December meeting have been mixed, and a handful of Committee members are feeling a bit anxious over what signals may lie in the market’s uber-dovish pricing, but the majority consensus remains to the sunnier side of the street, with a labor market that continues to heal and lower oil prices providing a net boost to growth. The renewed downward pressure on inflation will be acknowledged, which will add a cautious note to the communique, but it will be still framed as transitory, while real economy surveys of inflation expectations will outweigh the admittedly gloomier market break-evens.

*** The European Central Bank’s bold embrace of QE is unlikely to draw a specific reference in the statement, but the FOMC is in fact quite supportive of the ECB’s move, and is expecting that it hopefully marks the trough in the European travails. A long awaited upward turn in Europe’s prospects will, in turn, add to the upside risks in the US outlook by the end of this year and into the next, and at a minimum, the ECB actions should help address some of the potential nearer term risks to the downside.

*** All that said, we will be curious to see whether one or even both of two pressing issues make their way into the statement – unlikely but you never know — or perhaps in some form into the longer run statement that will be included in the Minutes.

The first is whether a reference to market volatility around the first rate hike or broader financial stability issues is rising to the forefront of Committee concerns. We think it is, but it may be deemed too early to display in the formal statement. Instead, it is more likely to increasingly enter into the speeches and public remarks by Fed officials in the run up to the crucial signaling of the March meeting.

The other is the ongoing debate whether to more explicitly confirm the symmetry to the 2% inflation target as a way to acknowledge concerns over the persistence of low inflation or even deflation, however low the probability. The question came up last January in the debate over tweaks to the longer run statement, and low inflation has obviously persisted through the year, and it has come up in both the October and December meetings.

But again, we think they will shy away from getting more explicit in today’s statement for fear if anything else of reinforcing the market’s deeply skeptical uber dovish pricing of rates hikes that will never come.

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