Investing.com - Financial markets and economists widely anticipate the Federal Reserve (Fed) to leave the price of money unchanged for ninth-straight month on Wednesday, but, assuming the U.S. central bank complies with market expectations, investors will pay close attention to the slightest hints for near-term changes to the path of policy normalization.
In general terms, the Fed is not expected to make a move on interest rates at the conclusion of its two-day policy meeting at 2:00PM ET (18:00GMT) on Wednesday, but investors will first focus on the statement and updated forecasts for economic growth and interest rates that will be released simultaneously with the rate decision for a first gauge on when the central bank contemplates returning to policy normalization.
Fed chair Janet Yellen will then follow up with what will be a closely-watched press conference 30 minutes after the release as investors look for any change in tone about the economy or future rate hikes.
Reasons that could convince the Fed to hold
Surveys of economists show the Fed forecast to stand pat until the December meeting, while a Reuters’ poll last week showed the median probability of a rate rise provided by experts was about 25% and only 6% of those surveyed expected the Fed to make a move.
Markets themselves priced in only a 15% chance of a hike, according to Investing.com's Fed Rate Monitor Tool.
“The Fed has never hiked with the market-implied probability as low as it is now, going back to at least 1994,” Goldman Sachs chief economist Jan Hatzius explained on Tuesday.
After recent dovish comments by current Fed governors Lael Brainard and Daniel Tarullo, former Minneapolis Fed president Narayana Kocherlakota pointed out another historic obstacle for the U.S. central bank to make a move.
He noted that it was more likely for the Fed to stay on hold given Brainard and Tarullo’s words of caution.
“The last time the Fed took an action from which two governors dissented was in 1993,” Kocherlakota pointed out.
Both financial media and analysts have emphasized the proximity of the U.S. presidential election on November 6 and suggested that the Fed would be unwilling to make a move in order to avoid accusations of being politically biased.
However, the historical record, while recognizing the “conventional wisdom” of avoiding political confrontation, doesn’t bear out this argument as the Fed has cut interest rates within two months of the election on three occasions since 1984.
More in line with the current path of monetary policy, the U.S. monetary authority actually increased rates by 25 basis points on September 21, 2004, exactly 12 years to the day ahead of Wednesday’s decision.
Bets on a hike outside consensus
Even confronted with a meager probability of a rate hike at Wednesday’s meeting and a large majority of analysts calling for the Fed to hold on interest rates, some experts have reiterated their call for a move this afternoon.
Barclays U.S. economist Rob Martin shrugged off the fact that his call for a hike was “so far out of consensus”.
“We've kept our conviction on September because we think that's what the FOMC has communicated to us -- that's what we think the chair and the vice chairman were talking about at Jackson Hole,” he explained.
BNP Paribas senior U.S. economist Laura Rosner also seemed convince that the Fed would move, explaining that there would always be uncertainties in the data and that robust hiring had given the Fed a window of opportunity to move ahead on policy normalization.
Rosner suggested that markets were betting that the Fed would “chicken out” once again, but attributed the lack of a move in the last nine months to “very specific shocks that were just coming from all directions.”
“Now, here we are, the dust has settled, risks have diminished, and you have data that's decent”, she concluded.
“So if the Fed is on a regimen of gradual hikes, why shouldn't it continue?"
Updated economic projections, interest rate dot plot and the Fed statement
Assuming the Fed will follow the markets’ script and leave rates unchanged, more attention could be paid to the updated economic projections as well as interest rate expectations as revealed by the famous dot plot that anonymously maps out Fed forecasts for future policy moves.
Morgan Stanley expects the median longer-run GDP estimate to be cut down to “1.8% or lower in September”, from 2.0% previously.
“Near-term forecasts for inflation and the unemployment rate are likely to be little changed,” these analysts said in a preview note to clients.
Along the same lines, Goldman Sachs foresees “little on the economic front”.
Both firms expect a significant reduction the outlook for future interest rate increases which had already moved from the four hikes expected in December to just two last June.
“We expect the dot plot to show a shallower path for policy over the medium term, with the median dot moving down to show one hike in 2016, followed by two hikes in 2017, three in 2018, and four in 2019, bringing the Fed funds rate to 2.875% at the end of the FOMC forecast horizon in 2019,” Morgan Stanley specified.
In this light, these analysts expect a lot of the markets’ focus to center on the FOMC statement which should deliver, in their view, “a fairly benign statement that leaves the door open to hiking this year, then lets the incoming data either support it, or push hopes into next year.”
Goldman Sachs’ Hatzius went a bit further in pointing out what he considered to be a Fed that was “far from unified” in their outlook, with seven members preferring to “raise rates now or at least very soon”.
“In these types of situations, it's common for the Committee to use the post-meeting statement to forge a compromise, so we're expecting a more hawkish tone in those remarks,” Hatzius said in a briefing on the Fed meeting.
Yellen to have the final word
Whatever the takeaways from the statement and updated forecasts, Yellen will take the stage at 2:30PM ET (18:30GMT) and have the final say on pushing back or pulling forward market expectations for the continuation of policy normalization.
Despite the fact that Fed rate decisions are based on an equal voting process, markets generally consider the chair at the helm to have the final say on rate decisions.
Investors will play close attention to Yellen’s remarks after her last speech on August 26 at the Jackson Hole Economic Symposium showed her ease her dovish stance.
“I believe the case for an increase in the federal funds rate has strengthened in recent months,” she stated.
Whether the Fed surprises markets on Wednesday with a rate hike or not, Yellen holds the strings to the financial markets’ perception of when the next move will happen.
Stay up-to-date on market expectations for future Fed policy moves by visiting:
http://www.investing.com/central-banks/fed-rate-monitor