Fed meeting: 3 things to watch for in Yellen's statement

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U.S. Federal Reserve Chair Janet Yellen speaks at "The Elusive 'Great' Recovery: Causes and Implications for Future Business Cycle Dynamics" conference hosted by the Federal Reserve Bank of Boston in Boston, Massachusetts, U.S., October 14, 2016. ... REUTERS/Mary Schwalm (Copyright Reuters 2016)

The Federal Reserve will conclude its two-day policy meeting on Wednesday with a statement from chair Janet Yellen, who could provide some key insight into the bank’s assessment of the economy and consequently, its impending policy plans.

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Although Yellen’s future with the central bank is uncertain – as her term expires in February and President Donald Trump has yet to make a decision on future leadership ideas – here’s a look at what to watch for in her statement and press conference Wednesday.

Balance sheet

September’s meeting is key because the Federal Reserve is expected to announce plans to unwind its massive $4 trillion balance sheet – a formal process for tightening monetary policy.

“Though the Fed will announce the process, it will not begin until October and will take several years to complete, shrinking the balance from $4.5 trillion to $3 trillion over the course of four years,” Ryan Sweet, director of Real Time Economics at Moody’s Analytics, said.

There is concern, however, over whether the economy will be able to sustain growth without the Fed’s stimulus.

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“Can this economy stand on its own without the Fed manipulating it?” Melissa Armo, investor and founder of The Stock Swoosh, asked. “Some say the feds have manipulated it too much and no one knows if the economy is strong enough now to stand on its own or not.”

Yellen has said the unloading process will be orderly and gradual. The bank will allow some bonds to reach full maturity without replacing them, starting next month. Investors will look for clues on Wednesday as to what the ultimate goal for the size of the Fed’s portfolio might be.

Interest Rates

The Fed is not expected to hike rates at this meeting, although investors will be waiting to hear whether the central bank might change its timeframe for upcoming rate increases.

Some analysts believe economic damage from two devastating hurricanes over the past month, and possibly more on the way, could postpone a hike projected for later this year until mid-2018.

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Others, however, believe the Fed will stick by its clearly laid out plans, and move forward with the rate increase this year, followed by three more in 2018.

Yellen, whose term expires in February, has taken painstaking efforts to telegraph the bank’s every move so as not to disrupt the financial markets. Policy decisions have been made in conjunction with the Fed’s dual mandate of 2% inflation and maximum sustained employment. While the unemployment level remained relatively stable at 4.4% in August, inflation has remained below the 2% target.

The Fed has raised interest rates four times, most recently in June. Tightening began in December of 2015 and the Fed funds rate remains in the 1% to 1.25% range.

While some analysts are looking ahead to interest rate projections for 2020, it is worth noting that it is unclear who will be leading the Fed at that time.

Economic indicators

Yellen will also assess the health of the economy, a key indicator that could predict whether the Fed will stay on track with future policy projections.

According to Sweet, the Fed’s GDP forecast for growth this year could be revised slightly higher.

Inflation has remained below the 2% target, a concern for Yellen and the central bank, and Sweet also projects the Fed could lower its growth forecast for core personal consumption expenditures – the Fed’s key inflation gauge — during Wednesday’s meeting.

Markets ended Tuesday’s session higher, with financial stocks providing the biggest impetus ahead of the Federal Reserve’s statement and press conference on Wednesday. Changes in the Fed’s telegraphed messages could impact trading on Wednesday.

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