Fed Decision Day Guide From Emerging Markets to FOMC Voter Shift

Here’s what to look for when the Federal Open Market Committee releases a statement today at 2 p.m. after a two-day meeting in Washington. It will be the last meeting for Chairman Ben S. Bernanke, who isn’t scheduled to give a press conference.

-- Stock turmoil: The worst start to a year for emerging-market stocks since 2009 probably won’t derail the FOMC’s plan to trim bond purchases in measured steps, said Eric Green, global head of foreign exchange, rates and commodities at TD Securities USA LLC in New York. The MSCI Emerging Markets Index has declined 6.8 percent so far this year, rising yesterday by 0.3 percent from a five-month low. More than $995 billion has been erased from the value of emerging-market equities since the Fed signaled in May that it may begin reducing asset purchases.

-- Falling equities are “not a game-changer for the Fed,” Green said. “For now the Fed will view this dispassionately” because the market turmoil “only matters as it relates to domestic objectives,” posing no immediate threat to U.S. growth or employment.

-- Fed policy makers will probably reduce their bond purchases in $10 billion increments over the next six meetings before announcing an end to the program no later than December, according to a Bloomberg News survey of economists on Jan. 10. The FOMC last month announced a reduction in monthly bond buying to $75 billion from $85 billion.

Forward Guidance

-- Solid threshold: The FOMC probably won’t reduce its unemployment threshold from 6.5 percent, even after the jobless rate last month fell to 6.7 percent, according to the median estimate of economists surveyed this month by Bloomberg. The committee on Dec. 18 strengthened its forward guidance, saying that it expects to keep the benchmark interest rate near zero “well past the time” joblessness falls below 6.5 percent.

-- “While we believe the 6.5 percent unemployment threshold will remain intact, it likely will increasingly be downplayed as a guidepost for future rate moves,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. A change in the wording over the threshold is unlikely today because the FOMC meeting isn’t followed by a press conference “where any language innovation could be explained.”

-- Slight alterations: Policy makers will probably make no more than “modest changes” in their post-meeting statement, maintaining their outlook on the economy even after weak payroll growth in December, according to Kris Dawsey, an economist at Goldman Sachs Group Inc.

Cold Weather

-- Fed officials may say cold weather distorted the jobs figures, and upgrade their assessment of the housing market, Dawsey said in a Jan. 24 note to clients. Still, “we do not think the Fed has significantly changed its thinking on the near-term trajectory of the economy,” Dawsey said.

-- New voters: Minneapolis Fed President Narayana Kocherlakota, Cleveland’s Sandra Pianalto, Philadelphia’s Charles Plosser and Dallas’s Richard Fisher will gain policy votes this meeting in an annual rotation of regional bank presidents on the FOMC. Fed governors have permanent votes, along with the president of the New York Fed, who serves as FOMC vice chairman.

-- Pianalto, who has never dissented on the FOMC, has said she backs a bond purchase reduction. While Fisher, Plosser and Kocherlakota dissented in 2011 from decisions to increase stimulus, Kocherlakota has since advocated greater accommodation, saying unemployment is falling too slowly and inflation is far below the FOMC’s 2 percent target.

Plosser, Fisher

-- Fisher and Plosser may cast dissenting votes this year in favor of faster tapering in monthly bond-buying, while Kocherlakota may dissent in support of more stimulus, according to Michael Hanson, a U.S. senior economist at Bank of America Corp. in New York. Still, with the remaining FOMC members having supported the start of tapering last month, the change in the committee’s voting membership is “unlikely to result in significant changes to the stance of Fed policy,” Hanson said in a note to clients.

-- St. Louis Fed President James Bullard will rotate out of a voting seat for 2014, as will Kansas City’s Esther George, Boston’s Eric Rosengren and Chicago’s Charles Evans. George, voicing concern about risks to long-term inflation expectations, dissented against seven FOMC decisions last year to maintain bond buying before backing the December tapering announcement. Rosengren dissented against the December decision, looking for more signs the economy is improving. This month he said “a gradual removal of accommodation is appropriate.”

Before it's here, it's on the Bloomberg Terminal.