Citi FX analyst Steven Englander has an interesting observation about tomorrow’s big FOMC decision (which culminates a two day meeting that starts today).
What’s unusual and interesting about the meeting is that there is the potential for both a hawkish and a dovish surprise.
The potential dovish surprise would be either a downward revision to GDP and inflation growth, showing a slower tendency to return to the twin mandate targets (however defined). This would make more concrete the view that the economy continues to face substantial headwinds over an extended period. The argument against is that it is hard to see the new evidence that makes a downward revision so compelling, especially when data have been hard to read on a cyclical basis. They could also make clear that they see full employment as far away from current levels, rather than the baseline which is that we are some distance from it — the more concrete, stronger the dovish thrust.
On the hawkish side, it would be a very hawkish surprise for the Fed not to change the language of forward guidance away from the 6.5%. This would suggest that the FOMC could not find agreement on a language change, and would be viewed as suggesting as more vigorous loyal opposition. Similarly, but less likely, any reference to the pickup in wages, even to say the gains are welcome, would be a hawkish surprise. Any ambiguity on the view that there is a lot of labour market slack — even to say that the Fed is trying to assess with more precision the extent of slack would be a hawkish shift from the confidence that the labour force would respond with additional supply to additional demand.
We’ll have much more analysis today and tomorrow.