Fed statement watched for clues on rate outlook

Market attention is now back on central bank policy. The coming week's FOMC meeting (Wed) will further fuel speculation about when the Fed will raise interest rates for the first time in almost a decade. No policy move is expected at this meeting. However, with recent comments from Fed Chair Yellen seemingly increasing the odds of a September hike, investors will be looking for a clearer signal on the timing. There is no press conference, nor will the Committee update its forecasts and so the only immediate clues will be in the post meeting press statement, notes Lloyds Bank.

Fed may want to send a signal. The comments in the Fed's press statement will likely be more upbeat on recent economic performance. It may also note less concern about the downside risks to inflation, although the recent fall in the oil price argues against this. A bigger question is whether the Fed wants to send a clearer signal that it intends to hike in September. This is the last FOMC meeting before September. At the start of the previous interest rate tightening cycle in 2004, the statement was changed to read "the Committee believes that policy accommodation can be removed at a pace that is likely to be measured". A similar change in language this time would strongly suggest that the FOMC intends to hike at the next meeting, unless the economic data takes a decisive turn for the worse.

"US growth picked up in Q2. The coming week will also feature some important data releases in the US. The first estimate of Q2 GDP growth (Thurs) is expected to show a significant rebound, after stagnation in Q1. We expect annualised growth of about 3%. The latest data may also reflect the impact of an inquiry into seasonal adjustment, which could lead to an upward revision to Q1 (-0.2). The employment cost index (Fri), which is generally regarded as the best measure of labour costs will also be of interest. This is expected to show a gradual pickup in wage growth", says Lloyds Bank.