The reassurance will be all the more necessary given that the U.S.
central bank is all but certain to announce the end of its massive
bond-buying stimulus when it wraps up a two-day meeting on
With U.S. inflation weak, the European economy stumbling and the
dollar on the rise, the big question is to what extent Fed officials
acknowledge risks to their expectations that the U.S. recovery will
continue to strengthen and allow them to raise rates around the
middle of next year.
The "overall tone of the communique should feel dovish as the Fed
counters the implied tightening in monetary conditions resulting
from the strong dollar and leans against the potential fallout from
the current global growth slowdown and disinflationary impulse," TD
Securities economist Millan Mulraine wrote in a client note.
The Fed will issue a policy statement at 2 p.m. on Wednesday. It
will not update economic forecasts or rate projections, and Fed
Chair Janet Yellen is not scheduled to address the media, leaving
investors to scour the statement for clues on the direction of
Here are the key things to watch for:
TIMING OF TIGHTENING
Several Fed officials want to stand by a pledge they will not hike
rates for a "considerable time," especially after the wild ride in
financial markets that hit stocks and depressed market-based
measures of inflation.
Still others, such as Boston Fed President Eric Rosengren, want to
drop any reference to time and instead reinforce that any policy
change will depend on economic data.
The Fed needs to fiddle with the language one way or another to drop
a reference to asset purchases. While investors are now betting a
rate rise won't come until late next year, many Fed officials have
said they are still eyeing a mid-2015 rate hike.
HOW ELSE MIGHT THE LANGUAGE CHANGE?
The U.S. unemployment rate has fallen to 5.9 percent and economic
growth is expected to run at a respectable 3 percent in the second
half of this year and next, a strong domestic picture that has the
Fed preparing to tighten policy.
But with Europe and Japan skating near recession, growth in China
slowing, and the dollar strengthening, concerns have grown that U.S.
inflation will not continue to edge toward the Fed's 2 percent goal.
The Fed could flag the risk that inflation might remain below target
for longer than previously thought. In another move that would be
interpreted as dovish, it could also highlight the threat that a
global slowdown could pose to U.S. growth.
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On the other hand, the swift decline in the jobless rate raises the
question of whether the Fed will soften its view that there is
"significant" underutilization of labor resources.
BOND-BUYING SHELVED BUT WITHIN REACH
Despite a suggestion by St. Louis Fed President James Bullard to
keep buying bonds through year end, the Fed is very likely to
announce an end to its third round of asset purchases.
The policy statement, however, could highlight the Fed's willingness
to re-start the program if needed. John Williams, head of the San
Francisco Fed, told Reuters this month he would be open to another
round of buying if the economic outlook changed "significantly,"
with inflation too low.
A THIRD DISSENT?
A wild card is the possibility that Loretta Mester, head of the
Cleveland Fed, dissents against the policy statement. A first-time
voter on policy this year, she has backed Yellen so far but in
recent speeches has urged the Fed to overhaul its guidance on when
rates will rise to focus more on conditions and less on timing.
Philadelphia Fed President Charles Plosser and Richard Fisher of the
Dallas Fed, both hawkish officials growing anxious to raise rates,
dissented against the Fed's September policy decision. A third
dissent would suggest Yellen's support is slipping within the
(Reporting by Jonathan Spicer; Editing by Andrea Ricci)
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