Here’s what to look for when the Federal Open Market Committee releases its policy statement at 2 p.m. today inWashington. Federal Reserve officials won’t provide new economic projections, and Chair Janet Yellen isn’t scheduled to give a post-meeting press conference.
-- With the FOMC poised to halt bond purchases, ending its third round of so-called quantitative easing, policy makers may want to underscore they are troubled by falling inflation and price expectations.
The Fed will “express concern about consistent undershooting of inflation,” said Jonathan Wright, who worked at the Fed’s division of monetary affairs from 2004 until 2008 and now teaches economics at Johns Hopkins University in Baltimore. The committee will “go into reverse to some extent,” restoring language it dropped in July expressing a warning that low inflation poses a risk to economic performance.
The committee in September said it “judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.” Thirty-three of 62 economists in a Bloomberg survey said they expect the FOMC to retain that language at this week’s meeting.
Janet Yellen, chair of the U.S. Federal Reserve.
Decelerating Inflation
Still, reports since September have shown inflation has decelerated. Prices as measured by the personal consumption expenditures index rose 1.5 percent from a year earlier in August, down from a 1.7 percent gain in May. The inflation gauge has fallen short of the Fed’s 2 percent target for 28 consecutive months.
Policy makers, including regional Fed Presidents William C. Dudley of New York, Charles Evans of Chicago and Narayana Kocherlakota of Minneapolis, have in recent days mentioned below-target inflation as a risk that weighs against raising interest rates too soon.
Roberto Perli, a partner at Cornerstone Macro LP in Washington, said that while the committee would likely acknowledge some threat, its worry may be diminished because energy has been the biggest factor holding down inflation.
“Oil is something the Fed has no control over,” Perli, a former Fed economist, said in a video commentary for clients.
The Brent Crude Oil Index has declined 23 percent this year.
Almost Over
-- The end of QE: Economists in the Bloomberg survey were almost unanimous, with 62 of 64 saying the FOMC will end its third round of asset purchases at this week’s meeting. Yellen pledged to do just that following the committee’s Sept. 17 session if progress continued toward the Fed’s goals on unemployment and inflation.
Fed St. Louis President James Bullard, who doesn’t vote on policy this year, said Oct. 16 the central bank should consider a delay in ending the program in light of falling inflation expectations. “That option will be on the table” and “there is a possibility” the group could reduce monthly purchases by $10 billion at the meeting and leave the final $5 billion reduction for December, according to Perli.
Still, ending QE “is a nearly universal expectation,” said Dana Saporta, an economist at Credit Suisse Securities USA in New York. “It would be quite a statement by the FOMC if they don’t.”
Even with the end of QE, the Fed will still hold a record $4.48 trillion balance sheet accumulated during the three rounds of asset purchases. That will continue to keep a lid on borrowing costs by limiting the supply of securities trading on public markets and keeping yields lower than they otherwise would be.
Considerable Time
-- Still “considerable”: Eighty percent of economists in the Bloomberg survey predicted the Fed will continue to say it will be appropriate to hold the target interest rate near zero for a “considerable time” after bond buying ends. Thomas Costerg, an economist at Standard Chartered Bank in New York, said recent market volatility and signs of slowing global growth will cause the Fed to act with caution.
The Fed’s benchmark rate has remained at zero to 0.25 percent since December 2008. The median forecast from committee members last month called for the rate to hit 1.375 percent at the end of next year, implying a mid-2015 start to increases.
“The strategy going into this meeting is really ’do no harm’,” Costerg said. “Given the recent market volatility, it doesn’t do any harm to keep it for now.”
Yellen is scheduled to hold a press conference after the FOMC’s next meeting in December. That would give her a better opportunity to mute the market’s reaction to changes in the committee’s forward guidance, Costerg said.
Still Significant
-- And “significant”: Sixty-four percent of economists in the Bloomberg survey expect the committee also to hang on to its language describing “significant underutilization of labor resources” despite U.S. unemployment falling in September to 5.9 percent, its lowest level since 2008.
“With U-6 currently at 11.8 percent, there is still a long way to go,” Philip Marey, senior U.S. strategist at Rabobank Groep in Utrecht, the Netherlands, wrote in an Oct. 27 note to clients, referring to a measure of unemployment that includes not only the jobless, but also workers who can only get part-time employment and people who have given up their search for work.
Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said there was “some chance” -- though less than 50 percent -- that the committee would alter the language on labor markets. One possible change, according to Saporta: The committee could simply drop the word “significant” when referring to underutilization of labor resources.
Global Demand
-- Global growth: The committee is sure to discuss whether weak global demand, from Europe toChina, is a threat to U.S. growth. Minutes of the Sept. 16-17 FOMC meeting published Oct. 8 revealed that worry and helped trigger the most volatile week for U.S. stocks since the financial crisis. Still, the group could opt not to highlight the issue in its statement.
“The Fed will be walking on eggs” in addressing global growth, Standard Chartered’s Costerg said. “I’m not sure they will want to bring that up in the statement. It will show up in the minutes” due out Nov. 19.
-- Dissenters: Dallas Fed President Richard Fisher and Philadelphia’s Charles Plosser dissented in September when the FOMC stuck with the “considerable time” phrase. Each has warned that keeping rates too low for too long could trigger higher inflation or lead to instability in financial markets. If the committee’s forward guidance remains unchanged, expect the same dissents, Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York, wrote to clients.
The Minneapolis Fed’s Kocherlakota may dissent because he wants the FOMC to express greater urgency about raising inflation to its 2 percent target, said Ward McCarthy, chief financial economist at Jefferies LLC in New York and a former Richmond Fed economist.
“There is a reasonable chance Kocherlakota dissents because he feels there is not enough of a defense of the inflation target and not enough emphasis on the inflation objective in the dual mandate,” McCarthy said.
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