|
 In one of the last major wild cards for financial markets in 2014,
the U.S. central bank's policy-setting committee is to issue the
statement and fresh economic forecasts on Wednesday at 2 p.m.,
following a two-day meeting. Fed Chair Janet Yellen will then hold a
news conference at 2:30 p.m.
The U.S. economy has strengthened and jobs have been created at a
faster-than-expected clip since the Fed's last meeting in October,
when it repeated that benchmark rates were unlikely to rise for a
"considerable time." Officials will have to decide whether to
replace that phrase despite below-target U.S. inflation and economic
weakness in Europe and Asia.
Top Fed officials have suggested mid-2015 is a reasonable time to
start tightening monetary policy after six years of near-zero rates,
and financial markets generally agree.
As investors search for clues on when and how aggressively the Fed
might move, here are the key things to watch:
THE LIFT-OFF LANGUAGE
The Fed has been toying with dropping the "considerable time" phrase
since at least September. In October, it restated the pledge but
made clear that rates could rise sooner if economic data were
strong, and later if they weren't.
If the phrase is dropped, as many Wall Street economists expect, the
Fed could replace it with a pledge to be "patient" in an effort to
prevent an abrupt market reaction that could throw off the economy's
momentum.
If it is kept, as centrist Fed policymakers Dennis Lockhart and John
Williams suggested last week, Yellen would have to explain the need
for such caution in the face of falling unemployment and signs that
wage growth is edging up.
HITTING THE INFLATION TARGET
There is no question the Fed is approaching its goal of full
employment after years battling the recession and its aftermath, so
it will need to somehow acknowledge that in the statement.
Unemployment is at a six-year low of 5.8 percent and monthly job
growth has averaged more than 250,000 over the last six months.
[to top of second column] |
More troubling is the elusiveness of the Fed's other goal of 2
percent inflation. The Fed's preferred inflation measure stands at
just 1.6 percent, and with global oil markets tanking, the dollar
soaring, and the economies of Europe, Japan and China weakening, the
threat is that it will slip further.
"To some at the Fed that's a chasm, to others it's a crack," said
Carl Tannenbaum, chief economist at Northern Trust.
Many Fed officials expect any downward pressure on U.S. prices to
prove temporary. The question is where Yellen stands.
FRESH FORECASTS FOR RATES, ECONOMY
The clearest hint of the Fed's plans could come in policymakers'
fresh projections of how high rates should rise over the next few
years. In September, they suggested the overnight federal funds rate
could rise to about 1.25 percent by the end of 2015, and about 2.75
a year later.
Given U.S. economic growth in the last two quarters was the
strongest in more than a decade, policymakers will also probably
nudge up their GDP expectations for the next two years, and lower
forecasts for inflation and unemployment.
(Reporting by Jonathan Spicer; Editing by Meredith Mazzilli)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
 |
