At this week’s Fed meeting, six items are likely to be discussed at some length by officials who continue to carry the bulk of America’s policymaking responsibilities. Some will make it to the policy statement that will be issued on Wednesday; some will come up during that day’s press conference by Chair Janet Yellen; and the rest will not be made public until the minutes and transcripts of the meeting are released later. Yet all are relevant for markets influenced by Fed policy. So here they are, arranged in increasing potential importance.
The dots: They represent the summary expectations of Fed officials going into this week’s meeting. As noted by Chair Yellen a few weeks ago, their ultimate influence on policy outcomes is limited. Yet markets love them. This time around, the dots are likely to point to some slippage in the timetable for rate hikes on account of tame inflation and unchanged to somewhat softer growth expectations.
QE: There have been no major developments since the last FOMC to disrupt what, by now, is a well-telegraphed QE exit. As such, look for the Fed to maintain its gradual pace of “tapering” with a view to a complete stop of its securities purchase program by the end of this year.
Growth and unemployment: The statements’ summary of the collective view of the FOMC — as opposed to the individual “dots” — is likely to reflect some softening in the shorter term growth projections but no material change to longer-term expectations. The Fed has not bought into the “secular stagnation” hypothesis; and it is unlikely to do so at this meeting. Instead, it will maintain its focus on the potential for a cyclical growth pick up and a further reduction in labour market slack. It will also note the importance of removing the slack given its more holistic assessment of the labour market (which includes part time activities, long-term joblessness, and wage growth).
Financial instability: In the last few weeks, three Fed officials have raised the possibility that the current policy approach involves a trade-off between economic immediate stimulus and possible financial instability down the road. This is a topic that will attract more attention in the weeks and months ahead. In the meantime, it is more likely to appear in the minutes and transcripts than in the statement.
Inflation: This has migrated up in the list of indicators that are particularly relevant for the calibration of monetary policy. The FOMC is likely to note the lack of both an imminent inflation threat and an immediate deflation risk.
Forward policy guidance: Don’t expect any major changes to the Fed’s current interest rate guidance; but do look for it to continue to evolve the overall communication framework as the FOMC integrate the new Fed governors.
Putting all this together points to an FOMC meeting that is unlikely to have a material and durable impact on markets. Instead, look for officials to signal a “steady as she goes” approach with the one potential disruptor — namely, concerns about future financial instability should the current phase of asset price inflation not translate strongly enough into higher growth and lower unemployment — being rather small on its radar screen for now.
Mohamed A. El-Erian is the former CEO/co-CIO of PIMCO. He is Chief Economic Advisor at Allianz and member of its International Executive Committee, Chair of President Obama’s Global Development Council and author of the NYT/WSJ bestseller “When Markets Collide.”
Follow him on twitter @elerianm