The Fed has a big two-day meeting this week that wraps up Wednesday, and the strongly held consensus is that the Fed won’t announce any policy changes at its meeting this week .
Instead, investors will be forced to look for little clues in the economic outlook and the Bernanke press conference to figure out the next move. Will the Fed give a hint that QE3 is coming at the June meeting? Maybe.
But there is one way the Fed could totally blow everyone’s mind at this meeting.
A trader just described to us how things could play out…
We just posted this chart, which is the current distribution of when FOMC members think the Fed will start tightening.
It’s a nice bellish curve, with the plurality of participants saying that 2014 will be when the next rate hike will come.
Because of this chart, you often hear that the Fed is on hold until 2014.
But that’s not technically true. The Fed can hike whenever it wants; it’s just that the plurality expect that the appropriate time for Fed hiking will come in the year 2014. UPDATE: A reader points out that the above isn’t exactly true. The 2014 year is in fact a result of the language in the policy announcement, not the histogram, and so even if there’s a hawkish shift, the language can remain in talk so long as Bernanke and his close allies want that to be the case….
However, the general view is that the economy has improved a bit since January, when this forecast came out.
So what happens if some of the uber-doves get a little more hawkish?
What happens if the 2 members who say the next rate hike will come in 2016 switch to the 2015 camp, but then nobody from the 2015 camp changes their mind?
Suddenly 2015 becomes the large bar! Get that? Suddenly the plurality of FOMC voters will be indicating that 2015 is the likely year of the first hike.
Technically a hawkish shift in the distribution of the outlook could create a stunning headline: Zero Interest Rate Policy all the way to 2015!
The market’s mind would be blown by this.