One of the Federal Reserve’s biggest challenges has been how tocommunicate when it will raise rates.
Most economists expect that the Federal Open Market Committee statement on Wednesday will remove language signaling it can be “patient” in normalizing accommodative monetary policy by raising interest rates. That would put an initial rate hike as soon as June in view, with a meeting-by-meeting assessment of the strength of US economic data.
In a note Tuesday, Citi’s Steven Englander highlighted the various ways the Fed could surprise investors, the foreign exchange market specifically, by communicating with a dovish tone, indicating it is prepared to keep rates lower for longer.
Here are the eight ways; the bolded portions are quoted directly:
- Lower the GDP forecast and blame the USD and the weather. The Fed would highlight the dollar’s incredible rally and the unususally harsh winter weather as threats to growth.
- Talk about import prices and inflation. Investors may question this, since the Fed has been vague on whether it prefers inflation driven by the supply and demand of domestic factors of production, or a broader measure that includes imports.
- Most likely USD reference shows up in Press Conference with milder reference in statement.
- ‘Maintain patience.’ The takeaway for investors would be that the dollar’s strength was a major factor in the FOMC’s decision making.
- USD explicit in statement. A mention of the dollar strength would shock dollar bulls and have a more negative effect on the currency.
- Drop the estimate of the long-term unemployment rate, and so widen their estimate of the amount of labour market slack in the economy.
- Lower inflation forecast out the inflation horizon. This won’t be a big deal for anyone except for those who take forecasts seriously.
- Lower the dots across the board and lower terminal rate. This sends a very dovish message, but its hard to tell whether any forecast like this is just opinion.