WASHINGTON, D.C.: The Federal Reserve is expected to maintain its slow march toward a normal monetary stance in its policy meeting Tuesday and Wednesday.
But a small, key adjustment to its messaging could confirm growing confidence in the economy.
After the surprisingly poor jobs market report for August, pressure has alleviated somewhat on the Federal Open Market Committee (FOMC) from so-called inflation hawks to move soon to raise interest rates.
And although US economic data Friday showed encouraging improvements in consumer spending and confidence, it likely is not enough to sway the FOMC off its plan to increase interest rates only as early as mid-2015.
“We expect the FOMC to have a moderately hawkish tone at its 16-17 September meeting,” said Thomas Costerg at Standard Chartered.
“The FOMC may update its exit principles, but there should be no surprises.”
The FOMC’s main policy action of the past year, the steady reduction of its once-$85 billion a month bond-buying stimulus program, will continue with the aim of winding it up completely in October.
The next step after that would be to begin raising the benchmark fed funds interest rate, stuck at zero since the end of 2008, and now blamed for overheating asset markets around the globe.
So far the Fed has stuck to its forecast—based on the averaged expectations of FOMC members—that interest rates won’t be lifted before the second half of 2015, and only slowly after then.
So far, too, inflation has remained repressed, providing the hawks with little to back their calls for an earlier rate hike.
But the labor market, and how that will shape inflation, remains a conundrum, and the FOMC is unlikely to change policy until they are more clear about it.
Waiting for data?
After seven straight months over 200,000, job generation plunged to 142,000 in August, raising questions over whether the economy is weaker than even doves like Fed chair Janet Yellen had thought.
Yellen’s stance since taking over the Fed in February has been to wait for the data, which means likely looking to see how the jobs market performs this month and next.
On the other hand, the Fed could adjust its message to the markets based on how it sees policy unrolling.
“Forward guidance” has played a crucial policy role since the 2008-09 recession, used to assure skittish market and business how long they can expect a hyper-loose monetary policy with ultra-low interest rates.
To reassure markets, in December when the FOMC embarked on its “taper” of the stimulus, it also assured that the end of the program would not lead directly to a rate hike.
The official guidance in FOMC policy statements was that any rate increase would come “a considerable time” after the stimulus program ends, with Yellen at one point suggesting six months.
Increasingly, though, some Fed inflation hawks and doves alike argue that the “considerable time” qualification ties their hands on policy, especially if inflation picks up suddenly.
Charles Plosser, the long-time inflation hawk who leads the Philadelphia branch of the Fed, objected to the phrase in the last FOMC meeting and voted against the Fed policy statement.
“Given the clear progress we have made toward achieving our long-term goals over the past year, and the progress and momentum that appears to be building in the economy and in the broader labor market, I no longer believe that the forward guidance language in the statement is appropriate or warranted,” he explained.
But such a move—which could curb excessive risk-taking in already sky-high markets—might be held off as the FOMC seeks more certainty on the economy’s path, said analysts at IHS.
“Even if the Fed was contemplating making the change next week, the disappointing August jobs report will likely stay their hand so that they can be sure that what was probably a fluke was in fact a fluke.”