In a few moments, the Fed will release its first federal funds rates projections which outline how all (even non-voting) Governing Board members want to change the federal funds rate.
From Nomura, here’s what to expect:
- Presumably, the chart outlining participants’ expectations for the first hike in the target federal funds rate will show a consensus around 2014, to match the date-specific language in the statement. Prior to the release of the statement federal funds futures pointed to the first fully priced in rate hike by mid-2014, but shifted further out following the release of the statement.
- The narrative to accompany the SEP will shed light on factors underlying participants’ forecast assumptions. It would be useful to know participants’ assessment of risks to the outlook surrounding Europe, US fiscal policy, and commodity prices. In addition, the narrative will include “qualitative information regarding participants’ expectations for the Federal Reserve’s balance sheet.” We expect that the FOMC will signal its intention to continue the “Operation Twist” maturity extension program and leave the door open to further large scale asset purchases (so-called “QE”), but make no commitment at the January meeting. In addition, we believe the Committee will stress that in the long run the size of the portfolio and interest rates are separate issues, indicating that the Committee could choose to raise its target FFR prior to reducing the size of the balance sheet.
- The coin-toss, so to speak, will be whether the FOMC releases a statement of longer-term goals and policy strategy. As of its 13 December meeting, the Committee had not reached consensus on this issue, and it is unclear