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 After watching the U.S. economy contract in the first quarter,
central bank officials have signaled they won't raise rates this
week. But they will have to judge whether healthier recent jobs,
wage and consumer spending data have put that earlier swoon safely
in the past, clearing the way for a rate hike - or hikes - later
this year.
The Federal Open Market Committee's policy statement, due to be
released at 2 p.m. EDT (1800 GMT) on Wednesday, will spell out how
policymakers feel the economy has progressed since their last
meeting in April, and particularly whether the labor market
continues to strengthen.
But just as important will be the release of policymakers'
individual economic projections, which will strongly hint at whether
the Fed intends to hike rates only once this year, or twice - a
critical point for markets and others trying to assess the shift to
a new "regime" of rising rates.
"The signal from the June ... meeting will be especially important,"
Goldman Sachs economist Kris Dawsey wrote this week, with an
"overarching message" that rates will start rising in September, and
are likely to rise again by the end of the year.
 Fed Chair Janet Yellen will hold her quarterly press conference
following the release of the policy statement and new economic
projections.
The meeting will be the first since the depths of the 2007-2009
financial crisis in which the outcome is not constrained by "forward
guidance," the open-ended commitment to keep rates low to counter
the worst downturn since the Great Depression.
That doesn't mean the outcome isn't fairly clear.
Keen to avoid disrupting global markets as they engineer the first
U.S. rate increase in nearly a decade, Fed officials have said they
plan to broadcast their intentions as clearly as possible without
making promises.
On that score, a June rate hike is almost certainly a non-starter,
with Yellen going no further than to say the rate "liftoff" is
likely sometime this year and other central bank officials sounding
a cautious note about the risks still facing the U.S. economy.
But the stronger recent data makes a September rate hike "very, very
likely," Northern Trust chief economist Carl Tannenbaum said. "The
real challenge the group is going to have is starting a program
which over three months will soften the earth" for a rate rise, he
said. MIND THE DOTS
With the FOMC statement whittled down to five paragraphs and shorn
of all of its crisis-era language, Wednesday's meeting may put even
greater weight on the individual forecasts and the related "dots" -
the estimate each Fed official will provide of where they think the
central bank's target interest rate will be at the end of the year.
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Those projections, however, are anonymous estimates by 17
policymakers using 17 sets of assumptions to determine where they
think rates should be at a particular time. That makes the dots not
so much a forecast of where rates will be but more an expression of
each policymaker's personal conviction about the right policy path.
To some, that's a weak basis for assessing where the Fed stands.
"It's just a very poor communication tool by modern central bank
standards," Bank of America economist Ethan Harris said. "They all
have different assumptions and they're all inherently inconsistent.
It's a hodgepodge of numbers."
But in the absence of a common forecast, the dots are among the main
sources of policy information the Fed produces.
As of April, the median projection for the fed funds rate stood at
0.625 percent, a level that implies two quarter-point rate increases
by the end of the year. If that median is left unchanged when the
fresh forecasts are released on Wednesday, the Fed would have four
more meetings this year to raise rates twice - likely fixing
September as the liftoff date.
If the median remains at 0.625 percent, "it would be a fairly clear
signal the Fed has a strong presumption that rates will go up in
September," analysts at Cornerstone Macro wrote in a preview of the
FOMC meeting.
Investors continue to take a slightly less aggressive view of the
Fed's intentions. According to an analysis of fed funds futures
contracts by the CME Group, liftoff is now anticipated in December,
though October is a near 50-50 bet.
(Additional reporting by Michael Flaherty; Editing by David Chance
and Paul Simao)
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