Fed Decision Day Guide From Yellen Debut to Overhaul of Guidance
Here’s what to look for when the Federal Open Market Committee releases its policy statement at 2 p.m. today in Washington along with new economic projections. It is the first meeting led by Federal Reserve Chair Janet Yellen, who plans to give a press conference at 2:30 p.m.
-- Rate-guidance overhaul: The FOMC will probably switch to “qualitative guidance” to convey its message that borrowing costs are likely to stay low until the economy improves, dropping a pledge to avoid raising the benchmark interest rate as long as unemployment exceeds 6.5 percent, according to 76 percent of economists in a Bloomberg News survey March 14-17. Officials including Philadelphia Fed President Charles Plosser, a voter on policy this year, said the FOMC should scrap the commitment now that unemployment is nearing the threshold.
-- The Fed will probably signal its policy plans based on a “broad array of economic indicators,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. and a former New York Fed economist, said in a note to clients. These will probably include nonfarm payrolls, the hiring rate, the quit rate and the pace of gross domestic product growth, said LaVorgna, who is based in New York. He added that Yellen in a speech last year said she watches those measures, among others.
-- “It’s a great time to make the change” in communications strategy because Yellen can explain the guidance in her first press conference as Fed chief, said Carl Tannenbaum, chief economist at Northern Trust Corp. in Chicago.
-- Steady speed: The FOMC today will announce another $10 billion reduction in the monthly pace of bond purchases and continue trimming at that pace at every meeting before announcing an end to the program in October, according to the median of responses in the survey of economists. The Fed announced its first cut in December, and in January scaled back purchases by another $10 billion, to $65 billion.
--“The bar to changing the tapering course is quite high,” said Thomas Costerg, an economist at Standard Chartered Bank in New York. “The data’s been mixed, not too hot and not too cold.”
-- Press debut: Yellen during the news conference will probably “reinforce the Fed’s commitment to continued accommodation and a gradual, data-dependent exit,” said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York and a former Fed economist.
-- She will face questions “on the extent of slack, the global risks to the outlook, how the Fed might further strengthen forward guidance and the regulatory environment,” Hanson said.
-- Spotlight on rate projections: An abandonment of the 6.5 percent unemployment threshold would shift more attention to FOMC participants’ forecasts for the federal funds rate, according to Aneta Markowska, chief U.S. economist at Societe Generale in New York. In December, their median estimate for the benchmark rate, represented by a chart with a dot for each estimate, was 0.75 percent at the end of 2015 and 1.75 percent at the end of 2016. Twelve of 17 FOMC participants projected the first rate increase in 2015.
-- The Fed will need “to convey to the market how the dots are likely to evolve in the face of data surprises,” Markowska said.
-- Brighter job outlook: Policy makers in their quarterly projections will probably forecast faster improvement in the job market than in December, when they saw unemployment at 6.3 percent to 6.6 percent by the end of 2014, Markowska said. Last month, unemployment was 6.7 percent. Fed officials probably will make few if any changes to their projections for inflation and economic growth, she said.
-- Fleeting weather: The FOMC will probably ascribe a first-quarter slowdown in the economy to the harsh winter rather than to fundamental weakness, according to Terry Sheehan, an economic analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. The New York and Philadelphia Fed districts “mostly attributed” slower growth to the weather, according to the Fed’s Beige Book business survey released March 5. Since then, better-than-forecast payroll growth in February and the first rise in retail sales in three months have highlighted resilience in the economy.
-- “They will acknowledge the weather impact, but they will also look at what underlying conditions are, which is for a continuation of this moderate growth that we’ve seen for quite a long time now,” Sheehan said.
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