It is all about “patient.”
On Wednesday, the Federal Reserve will announce its latest monetary policy decision after wrapping up its two-day meeting.
The decision is set for release at 2:00 pm ET, and will be accompanied by the Fed’s latest Summary of Economic Projections. Fed Chair Janet Yellen will also hold a news conference set to get underway at 2:30 pm ET.
The last time we heard from Yellen back in December, the Fed dropped the much-debated phrase “considerable time” when discussing how long it would wait to raise rates after the end of its asset purchase program, which it concluded in October 2014.
“Considerable time” was replaced with “patient,” and on Wednesday, Wall Street expects the Fed will ditch this language, setting the table for rate hikes sometime this year.
The Fed has not raised interest rates since June 2006.
If not “patient” then what?
In December, Wall Street widely expected the Fed to replace “considerable time” with “patient.” Following the December statement, Yellen spoke to reporters and said the Fed was expecting to maintain its current policy stance, “for at least the next couple of meetings.”
Yellen most recently spoke in front of lawmakers in late February and largely reiterated the Fed’s stance that it will remain “data dependent” with respect to its monetary policy and reiterated that it would likely keep rates unchanged for the “next couple of meetings,” implying it would not move in March or April.
In a note to clients ahead of the meeting, analysts at Goldman Sachs said they expect the Fed to change its language on rate hikes could read as follows (emphasis added):
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 per cent target range for the federal funds rate remains appropriate. If economic conditions continue to improve, as the Committee anticipates, and the Committee is reasonably confident that inflation will move back over the medium term toward 2 per cent, then it will soon be the case that an increase in the target range could be warranted at any meeting. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
Goldman said that the revision would highlight the “reasonably confident” criterion for the inflation outlook and while this change would indicate the potential for a June rate hike, it would not make this a foregone conclusion.
Michael Hanson at Bank of America Merrill Lynch wrote ahead of the meeting that the Fed is trying to stress two main points.
The first is that the Fed is hiking interest rates to normalize rates, not to throttle back inflation or bubbly markets. Secondly, Hanson sees need for the Fed to emphasise that it will keep policy “quite accommodative” even after it begins tightening.
Inflation and growth outlooks
Along with its policy statement and Chair Yellen’s news conference, the Fed will also release its latest Summary of Economic Projections, which includes the Fed’s latest growth and inflation outlooks, as well as an updated “dot plot.”
Goldman expects that the Fed will modestly downgrade its growth outlook for the economy, taking down each of its December GDP outlooks for growth of 2.8%, 2.75%, and 2.4% for 2015, 2016, and 2017 owing to the recent strength in the US dollar.
In Goldman’s view, the Fed will also take its PCE inflation view to less than 1% for 2015, down from a previous outlook for 1.3% inflation given the decline in gas prices.
The Dot Plot, which shows the Fed’s expected path of interest rates, has shown a decidedly more aggressive and ambitious path than the market is pricing, and this chart from Bank of America Merrill Lynch shows how the paths between the Dot Plot’s projections, the market’s pricing, and actual rate cycles differs.
The data depends
The Fed has said time and again that it will be “data dependent” in looking to raise interest rates. But just what this looks like the market seems unsure.
Joe LaVorgna at Deutsche Bank wrote in a note to clients said that, “in order for financial markets to properly price a ‘data dependent’ Fed, they will need some sense of what data the Fed is focused on in its decision-making process.”
LaVorgna said that the Minutes from the Fed’s January meeting could hold some clues, notably this passage:
There was wide agreement that it would be difficult to specify in advance an exhaustive list of economic indicators and the values that these indicators would need to take. Nonetheless, a number of participants suggested that they would need to see further improvement in labour market conditions and data pointing to continued growth in real activity at a pace sufficient to support additional labour market gains before beginning policy normalization. Many participants indicated that such economic conditions would help bolster their confidence in the likelihood of inflation moving toward the Committee’s 2 per cent objective after the transitory effects of lower energy prices and other factors dissipate.
LaVorgna added that with job growth running at its best pace since the 12-month period ending March 2000, the Fed is likely shifting its discussions from whether to raise rates to how it best does so without causing a severe market reaction.
This is the big market event of the week, and could be the biggest market moving event since the so-called “taper tantrum” in spring 2013.
We’ll have full coverage of the statement when it drops and we’ll have complete live coverage of the conference on Business Insider on Wednesday.