FOMC Not Expected to Rock the Boat with Policy Statement

It’s a bit ironic that a probable outcome of the recent turbulence that has rocked global economies will likely result in a very quiet meeting this week by the U.S. Federal Reserve.

The policy-setting Federal Open Markets Committee (FOMC) will meet Tuesday and Wednesday with a statement announcing any new policy shifts scheduled for release at 2 p.m. ET Wednesday.

Despite an historic new stimulus program targeting the threat of dangerous deflation in the 19-member eurozone, a new far-left government in Greece that could upend years of austerity in that fiscally beleaguered nation and the increasingly uncertain fallout from freefalling oil prices, the FOMC statement isn’t expected to break any new ground.

Specifically, the statement isn’t expected to offer any additional clarity toward when the Fed plans to start raising interest rates.

David Kelly, chief global strategist at J.P. Morgan Funds, emphasized this point, saying in a note, “The Federal Reserve is not likely to rock the economic boat with its FOMC statement on Wednesday.”

So Much Conflicting Data

In other words, there’s so much conflicting economic data out there that Fed policy makers are apparently loathe to latch onto any single narrative in an effort justify any shifts in central bank policy, namely the timing of interest rate hikes.

Investors have been desperately seeking clues from the FOMC for months as to when the central bank will finally pull the trigger and start raising rates from their current near-zero range where they were set over six years ago in the wake of the 2008 financial crisis.

Fed Chair Janet Yellen, as well as many of her FOMC colleagues, have stated repeatedly that rates will likely start moving higher in mid-2015 unless something significant happens that dramatically shifts the trajectory of global economic data.

Currently the broad economic narrative holds that the U.S. economy is finally gaining sustained momentum as much of the rest of the world stumbles.

To wit, U.S. labor markets are stronger now than at any point in the last decade. About three million Americans returned to the workforce in 2014, and the U.S. created more jobs last year than in any since 1999. At the same time across the Atlantic the prolonged threat of deflation prompted European Central Bankers last week to approve a quantitative easing or monthly bond-buying program intended to pump cash and energy into Europe’s stagnant economies.

Meanwhile, a glut of supply combined with weak demand notably in Asia has caused the price of oil to plummet more than 60% since mid-2014. While cheaper oil will put more money in consumers’ pockets, the broader fallout on the global economy remains uncertain. Specifically, analysts are concerned how cheaper oil might negatively impact the important global energy sector, as well as energy production regions in the U.S. and around the world.

J.P. Morgan’s Kelly said the FOMC statement will probably acknowledge all the conflicting economic data:  “The statement may well refer to the continuing weakness in wage growth and the decline in current inflation readings due to lower oil prices.  However, it may also acknowledge the stimulative effect of lower oil prices and continued improvement in the labor market.

Given all the mixed economic messages the Fed this week is expected to retain the vague language it has used in recent months to convey the message to markets that the Fed’s plans haven’t changed – that interest rates will likely start to gradually move higher in mid-2015.

Statements and minutes from each of the Fed’s most recent meetings show FOMC members are increasingly concerned how they will communicate to global markets their decision to eventually raise interest rates.

No Rate Hike Decision Imminent

In an effort to further explain how economic and financial data will influence that decision, central bankers last month said they could “be patient” while sifting through that data as they determine the timing and trajectory of a rate hike.

Adding the phrase “be patient” to language that already said rates would remain low “for a considerable period” after the Fed’s bond buying program ended in October was interpreted last month by investors as more evidence the Fed will continue to take a dovish approach toward higher rates.

“The inclusion of the phrase ‘patient’ in the wording of the last statement was an acknowledgement that the Fed is considering when it should begin to raise rates while making it clear that such a decision isn’t imminent,” said Kelly. “The Fed is likely to stick with this language on Wednesday with the real FOMC battle occurring at the meeting, potentially in late April, when they decide to remove it.  It will also be interesting to watch for dissenting opinions in the Fed statement.”

In addition, last month’s meeting reiterated the consensus agreement that interest rates will rise “gradually” once the decision is made to make borrowing more expensive through higher rates. Caution was necessary, according to minutes from the December meeting, because even as the U.S. economy heals, economies around the globe are struggling, namely in Europe, Russia and Asia.