The One Thing To Watch For In Today's FOMC Statement

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Heads up! The Federal Reserve announces the FOMC’s latest decision on monetary policy at 2 PM ET.

The big story surrounding previous FOMC meetings this year has been the outlook for the Federal Reserve’s quantitative easing (QE) program.

According to a survey conducted by Bloomberg News, consensus expectations are that the FOMC will begin tapering purchases of mortgage and Treasury bonds under QE beginning in the fourth quarter of 2013 – from the current rate of $85 billion per month to $50 billion per month – before bringing purchases down to zero in the first quarter of 2014.

For now, though, tapering bond purchases does not appear to be on the agenda any time soon.

The main reason: a slowdown in several key economic indicators, especially on the inflation and employment fronts.

BofA Merrill Lynch economist Ethan Harris argues that due to disinflation (positive, but falling inflation), the FOMC is unlikely to have tapering top of mind. In fact, he says that down the road, the FOMC may even elect to increase the amount of bonds it buys under the program if disinflation persists. Harris cites the BAML rates team in saying that there is probably room for the Fed to increase its buying of Treasury bonds from $45 billion a month to $70 billion a month.

Along those same lines, UBS economist Drew Matus says any change in the way inflation is treated in the language of the statement is a key development to watch for.

One area of concern we will be watching carefully is the inflation language. The March statement read “Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices.”

This acknowledged that the recent dip in inflation was caused by energy prices – which are usually thought to be a boon to the economy – and placed the emphasis on core inflation. However, comments by some Fed officials have suggested the recent dip is a cause for concern. We believe that the statement will reflect the view of the Chairman and, as such, any change in the statement language may suggest an accommodative Fed for longer.

Markets may already be pricing in such an outcome.

“Ahead of the release of the FOMC statement today, investors will look for indications that the disappointing US data of late may have changed the policy outlook for the coming months,” says Citi strategist Valentin Marinov. “We think that the FX markets are already leaning towards a more dovish Fed statement today with the dollar losing ground against EUR, JPY and GBP.”

We will have the full statement LIVE at 2 PM ET. Click here to refresh for the latest >

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