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 Markets have followed Fed speakers closely in recent weeks for clues
on whether the U.S. central bank will change key language in its
post-meeting statement regarding how long it will keep benchmark
interest rates near zero.
Some expect the Fed to remove the reference to "considerable time"
when setting a time frame for near-zero rates and maybe replace it,
as it did ahead of the 2004-2005 monetary policy tightening cycle,
with a nod to being "patient".
But that belief has been complicated somewhat by the slump in oil
prices <LCOc1> <CLc1> that has pulled inflation expectations lower
and caused the S&P stock index <.SPX> to post its first negative
week in eight on Friday. The expectation of lower inflation could
prevent the Fed from changing its current stance.
Client notes from Goldman Sachs, Citi and Bank of America/Merrill
Lynch this week deal with expectations for the removal of the
wording, roughly agreeing that however close the call is, it is more
likely than not that the phrase will go away.
"They are going to remove it; I don’t think (Fed Chair Janet Yellen)
is going to keep it in there just because of what we are seeing with
the energy sector," said Sean McCarthy, regional chief investment
officer for Wells Fargo Private Bank in Scottsdale, Arizona.
"All the other data has been strong, whether you are looking at
construction, at the ISM numbers, and especially the jobs data that
she cares about most."
Indeed, recent statements from Fed officials suggest the language
could be changed. Goldman Sachs, in a note, pointed to "widespread
use of the word 'patient'" as a signal that "some participants would
prefer to revise the current language."
The lack of consensus on the Fed's move all but guarantees that
whatever the Federal Open Market Committee's statement says on
Wednesday the stock market will be volatile, as it usually is on Fed
decision days.
"The goal," said the BofA/Merrill note, "will be to smooth the
market’s reaction. The Fed does not intend to signal a fundamental
shift in policy, and we expect chair Yellen’s press conference
remarks to reinforce this point."
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The FOMC meets on Tuesday and Wednesday with a statement and
forecasts expected Wednesday at 2:00 p.m. EST (1900 GMT), followed
by Yellen's press conference half an hour later.
Markets are pricing in a disinflationary environment in the next few
years. Short-term inflation expectations as measured by the yield
gap between five-year Treasury Inflation Protected Securities (TIPS)
<US5YTIP=TWEB> and regular five-year Treasuries <US5YT=RR> fell to
1.16 percent on Friday, the lowest in nearly 4-1/2 years, Tradeweb
and Reuters data showed.
"There is no pressure out there to get ahead of inflation because
there is no inflation out there," said Terry DuFrene, global
investment specialist at J.P. Morgan Private Bank in New Orleans.
Yellen is seen as erring on the side of being too dovish rather than
risking a move that comes in too soon and, compounded with the soft
data out of the euro zone, Japan and China, adds to the risk of a
slowdown in the U.S. economy.
However fed funds rate futures also show that the market expects a
rate hike at some point in the third quarter of next year. The Fed
is faced with the need to be slightly more hawkish in order to
marginally move towards starting the tightening cycle.
(Reporting by Rodrigo Campos Additional reporting by Chuck
Mikolajczak; Editing by James Dalgleish)
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