What will the Fed do?

There are numerous possible twists the Federal Open Market Committee (FOMC) could introduce in next Wednesday's statement that will dominate the global calendar. It will be accompanied by a press conference and revised Summary of Economic Projections. 

According to Scotiabank Economics, the FOMC is expected to have a marginally less accommodative tone but not all signals will point in this direction as the key will be to retain flexibility to begin raising interest rates at any point from June onward.

Without any specific meeting to be teed up for lift-off just yet, the following possibilities can be expected from the Fed:

• Removal of 'patient' in favour of language that connotes flexibility to raise the federal funds target rate at any point from June onward.
• Possible downward revision to the unemployment rate forecast since at 5.5% in February the rate is getting closer to the Fed's 5.2-5.3% forecast range and job growth has exceeded expectations.
• Possible upward revision to GDP growth forecast for this year, as the FOMC range (2.6-3.0%) is currently somewhat low relative to the median forecast captured in the Bloomberg consensus (3%). As oil has pushed somewhat lower since the December forecasts, the FOMC could be somewhat more upbeat toward growth prospects.
• Downward revision to prior headline PCE inflation forecast of 1.0-1.6% in 2015 and perhaps to core PCE inflation (1.5-1.8%). Key will be whether next year's inflation forecasts remain unchanged as that would continue to signal that the FOMC is looking through transitory downward influences upon inflation readings. The statement language is likely to remain unchanged via "Inflation has declined further below the Committee's longer-run objective, largely reflecting decline in energy prices."
• It is unclear whether the FOMC acknowledges that market based inflation expectations have risen somewhat compared to when the FOMC expressed concern about them in the January statement. What complicates this is that market based measures of inflation expectations - like TIPS breakevens or the Fed's preferred measure of the five year forward inflation swap (chart 1) -have slipped somewhat of late even though they remain higher than at the time of the January meeting and hey reflect liquidity and other premia beyond just inflation expectations.
• It is possible that the FOMC alters reference to international ?risks by somehow acknowledging policy easing across foreign central banks and an improvement in drivers of global growth while indirectly flagging mild concern over the USD. On this latter point, we continue to advise caution on what measure of the currency is used. DXY, Bloomberg's index, and EURUSD are all not the way the Federal Reserve considers currency risk. The inflation adjusted broad dollar index is the way the Fed looks at it and through to the end of this past February this monthly gauge was up by 10% since last summer. Federal Reserve staff research has argued there is a) a modest degree of pass-through into inflation readings via USD-motivated import price changes; and b) that the effects on the broad current account balance of the US economy are spread over about a four year period of time.
• Recent softness in consumer spending will likely be looked through on account of weather effects.