Fed Decision Day Guide: Considerable Debate on Forward Guidance

Here’s what to look for when the Federal Open Market Committee releases its policy statement and new economic projections at 2 p.m. today in Washington and Federal Reserve Chair Janet Yellen holds a press conference at 2:30 p.m.

— Still “considerable”? It’s shaping up as a close call. Thirty-two of 60 economists in a ForexSQ survey said the FOMC will stick to its pledge to keep its benchmark interest rate near zero for a “considerable time” after it finishes bond purchases.

Cutting that language could spook investors, said Lindsey Piegza, chief economist at Sterne Agee & Leach Inc. in Chicago. “One of the biggest concerns with removing that is that the markets will read it as a hawkish tilt,” she said.

The committee doesn’t need to drop the phrase immediately, because the end of bond purchases probably won’t come for at least another month. The FOMC today will probably announce that monthly purchases will be reduced by another $10 billion, to $15 billion, Maury Harris, chief economist at UBS Investment Bank in Stamford, Connecticut, said in a note to clients. Most analysts expect October will be the last month of the program, putting the FOMC on track to announce an end to it at the Oct. 28-29 meeting.

If the committee does cut the “considerable time” language, it may replace it with something intended to blunt the reaction. “In its place, the statement may say that given the FOMC’s economic outlook, policymakers could be ’patient’ in removing monetary accommodation,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York.

In similar circumstances in 2004, Alan Greenspan, the Fed chairman at the time, suggested the FOMC statement drop the words “considerable period” and substitute a reference to “patience.” His colleagues agreed and their post-meeting statement was adjusted accordingly.
Calming Markets

— Press briefing: If the phrase is removed, Yellen would probably devote her press conference to calming the markets.

Yellen may also use the briefing to discuss the committee’s forecasts for the federal funds target rate and possibly provide more details about how it will approach raising rates, Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, wrote in a note to clients. The Fed has already said it plans to use new tools in its exit from record monetary stimulus, including its interest rate on excess reserves and overnight reverse repurchase agreements, to set a floor under short-term borrowing costs when it raises the fed funds target rate.

More generally, 75 percent of economists in a ForexSQ survey said they expect Yellen to emphasize in her briefing that the FOMC needs to “be flexible and responsive to the data” in making policy changes. A third of respondents also predicted she will call attention to slack remaining in the labor market.
Labor Markets

— Labor-market slack: The FOMC’s July reference to “significant underutilization of labor resources” will also probably remain in the committee’s statement after Labor Department figures showed U.S. employers hired fewer workers than forecast in August, Ethan Harris, co-head of global economics research at Bank of America Corp. in New York, wrote in a note to clients. “That language change probably requires a couple of better jobs reports,” he said.

— The FOMC will release a new set of economic forecasts and members’ expectations for the federal funds rate, including their first projections for 2017. The new rate projections are likely to be higher than investors expect, Roberto Perli, a partner at Cornerstone Macro LP in Washington, wrote in a note to clients. He estimates a 2017 median forecast of 3.75 percent, which would match the FOMC’s long-term projection from June.
After Liftoff

That would underscore the gap between the market’s and the FOMC’s projections for the pace of rate increases after liftoff. The committee’s median forecasts in June put the benchmark at 1.13 percent at the end of 2015 and 2.5 percent at the end of 2016. Fed funds futures contracts show investors expect the benchmark rate will be 0.74 percent and 1.78 percent on those dates. The farthest-dated contract pegs the rate at 2.37 percent at the end of August 2017.

“It’s remarkable to me that the markets don’t want to listen to what the Fed is saying,” said Alan Levenson, chief U.S. economist at T. Rowe Price Group Inc. in Baltimore. “Either you don’t believe the Fed’s economic outlook or you don’t believe they are going to do what they say they are going to do.”

— Economic growth projections for 2017 will probably fall neatly between the FOMC’s 2016 median forecast and its slightly lower long-run estimates, with little change expected for either of those bookends, said Laura Rosner, U.S. economist at BNP Paribas in New York. The panel in June estimated 2016 growth at 2.5 percent to 3 percent and a long-run rate of 2.1 percent to 2.3 percent.
Inflation Estimates

— The personal consumption expenditures price index, the Fed’s preferred inflation gauge, rose 1.6 percent in the year through July. While median Fed projections on inflation are unlikely to rise, it’s worth watching to see if the upper range of estimates for 2016 moves up, Rosner said. That upper level in June was 2.4 percent for 2015, meaning some members anticipate an overshoot of the Fed’s long-term 2 percent target, and fell back to 2 percent for 2016 projections.

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