Fed Chair Janet Yellen hinted at the U.S. central bank's broad
agenda a couple weeks ago when she laid out three "big" issues
officials need to track: the level of slack in the labor market,
whether inflation is rising back toward the Fed's 2 percent goal,
and the factors that could derail the economic recovery.
Unexpected "twists and turns," she said, could force the Fed to
diverge from its highly telegraphed plan to end asset purchases
later this year and raise interest rates in 2015.
Yellen and her colleagues are debating what economic conditions
would set the stage for a rate hike, whether the Fed should start
letting its balance sheet shrink before or after it acts to push up
borrowing costs, and whether it should respond to the possibility of
asset bubbles in some markets.
Fed officials, who will meet on Tuesday and Wednesday, disagree
sharply on the answers to these questions, and consequently on the
best longer-term plan for rate rises. But unlike their counterparts
at the European Central Bank, who face a threat of deflation, U.S.
central bankers are under little pressure to pivot quickly on
"We doubt any major change will emerge" in the Fed's policy
statement, said Annalisa Piazza, fixed income strategist at Newedge.
The statement, to be released at 2 p.m. (1400 GMT) on Wednesday, at
the close of the meeting, will not be accompanied by new economic
forecasts or a news conference, events that are only scheduled
Recent data has largely borne out the Fed's presumption that a
mid-winter slowdown in the economy was due to unusually severe
weather. In addition, with bond yields down and stock prices up
since the Fed began tapering its asset purchases in January, market
conditions are not threatening to undercut the economy's momentum.
The relative stability makes it an easy call for the Fed to trim its
monthly bond buying by $10 billion for a fourth consecutive meeting.
This would take the purchases down to $45 billion and put the Fed
about halfway along its plan to end the quantitative easing program
by late this year.
And because officials completed a much-needed revamp of a low-rate
promise last month, they can now take the time to dig into the
longer-term strategy that will guide them when they finally begin
[to top of second column]
RAISING RATES: "A MATTER OF FEEL"
At the last policy meeting in March, all but one official backed a
new pledge to keep rates near zero for a "considerable time" after
the bond-buying ends. The lone dissenter, Minneapolis Fed President
Narayana Kocherlakota, has already signaled he will not continue to
Since then, a handful of officials have suggested the Fed should be
more specific about when rates will rise. Boston Fed President Eric
Rosengren has floated the idea of keeping rates near zero until the
economy is within one year of reaching full employment and 2 percent
Richard Fisher, who heads the Dallas Fed, panned the idea. "It is a
matter of feel," he told reporters in Austin earlier this month. "I
don't think you can put a specific time frame on it. And I wish we
could, but I don't think that would be responsible monetary policy."
Another question policymakers need to answer in coming months is
whether a test facility for conducting reverse repurchase
agreements, which temporarily drain cash from the financial system
and could help control market rates when the Fed tightens monetary
policy, will be adopted as a key tool.
The relatively quiet bond market "allows the Fed to reflect on
big-picture themes," said Thomas Costerg, economist at Standard
Chartered Bank. "There is mounting pressure to clarify the exit
strategy and the role of some liquidity facilities, although it is
unlikely that the Fed will decide this now."
(Additional reporting by Richard Leong in New York;
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