Fed Decision Day Guide From Dot Plots To Exit Strategy

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. Federal Reserve Chair Janet Yellen plans to give a press conference at 2:30 p.m.

-- Sticking to zero: Yellen will probably emphasize that the Fed will keep its main interest rate close to zero for at least a year even with inflation rising toward the Fed’s 2 percent goal and the job market improving faster than officials expected, said Roberto Perli, a partner at Cornerstone Macro LP in Washington.

-- The 6.3 percent unemployment rate is already at the top end of the range that most officials in March forecast for the end of this year.

-- Similarly, the personal consumption expenditures price index, the Fed’s preferred inflation gauge, rose 1.6 percent in the year through April, a rate most officials expected at year-end. The consumer price index, a separate inflation measure, rose last month by 0.4 percent, the biggest gain since February 2013.

-- Yellen will probably say “rate hikes are at least a year away,” said Perli, former associate director of monetary affairs at the Fed. “Fed policy is likely to remain very supportive of equities,” he said in a note to clients.

-- Lingering chill: Fed officials will probably lower their estimates of 2014 gross domestic product growth to account for a first-quarter contraction caused in part by harsh winter weather, said Michael Gapen, a senior U.S. economist at Barclays Plc in New York.

Growth Estimate

-- Fed officials’ estimates for growth this year will probably fall to a range of about 2.6 percent to 2.8 percent from 2.8 percent to 3 percent in March, Gapen said.

-- Still, officials will probably stick to an estimate of 3 percent growth for “the second half of this year and beyond” amid signs the economy is gaining strength, said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York.

Maturing Bonds

-- Steps toward exit: Officials will probably discuss whether to continue reinvesting maturing bonds on the Fed’s $4.34 trillion balance sheet after they raise short-term rates, Gapen said.

-- Such a decision, proposed last month by New York Fed President William C. Dudley, would represent a change from the FOMC’s exit strategy outlined in June 2011. According to that strategy, the Fed would stop reinvesting before raising rates.

-- Yellen may “use the press conference as an opportunity to float the idea of modifying the Fed’s exit sequence,” economists Laura Rosner and Bricklin Dwyer of BNP Paribas in New York wrote in a note to clients. “We expect the FOMC to more explicitly communicate its intentions to continue reinvestments for some time after liftoff, although when it chooses to move ahead with this announcement is less certain.”

Reconcile Forecasts

-- Mixed messages: Yellen during her news conference may be asked to reconcile the Fed’s forecasts for interest rates, inflation and unemployment, said John Ryding, chief economist at RDQ Economics in New York and a former economist at the New York Fed.

-- The 2.25 percent interest-rate forecast for the end of 2016 is below the 4 percent level officials consider appropriate in the long run -- even as they expect to achieve their goals for full employment and 2 percent inflation in 2016. The central bank has held the main interest rate at zero to 0.25 percent since December 2008.

-- Blame for volatility: Yellen will probably try to avoid taking responsibility for unusually low volatility in financial markets, said Drew Matus, deputy U.S. chief economist at UBS AG and a former markets analyst at the New York Fed.

-- Dudley said last month low volatility may signal investor complacency about risk, making him “a little nervous.”

-- “We’ve attributed low volatility to zero rates,” Matus said. Referring to Yellen, he said, “I would expect her to tread gingerly around” an explanation for low volatility. “The idea that the Fed is to blame is now the obvious answer.”

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