Fed Decision-Day Guide: QE Tapering to Inflation Debate

Here’s what to look for when the Federal Open Market Committee releases its policy statement at 2 p.m. today in Washington. Federal Reserve officials won’t provide new economic projections, and Chair Janet Yellen isn’t scheduled to give a post-meeting press conference.

-- Steady tapering: The FOMC will probably trim monthly bond purchases for a sixth straight meeting, to $25 billion, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. That would keep the Fed on pace to announce an end to purchases in October, he said.

-- Labor slack: At the same time, the panel will discuss signs of persistent labor-market weakness to maintain its view that interest rates should stay low for a “considerable time” after quantitative easing ends, according to Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore.

-- While the jobless rate is down to 6.1 percent, that’s partly because the proportion of working age people in the labor force is the lowest since 1978. “Unemployment is falling faster than expected, but they can still say that other labor-market indicators are mixed,” said Wright, an economist at the Fed’s division of monetary affairs from 2004 until 2008.

-- Lagging wages: The FOMC’s most vocal supporters of continued stimulus will probably also cite weak wages, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

Hourly Earnings

The FOMC wants “clear evidence of firming wage inflation” before determining that the U.S. is approaching full employment, LaVorgna said in a note to clients. After adjusting for inflation, average hourly earnings last month fell 0.1 percent from a year earlier.

-- Inflation debate: The FOMC will repeat in the statement its assertion that persistently low inflation could pose risks to economic performance -- even in the face of recent signs that consumer prices are moving up toward the Fed’s 2 percent goal, said Dana Saporta, director of U.S. economic research at Credit Suisse in New York.

The reason: Policy makers are probably concerned that any change in their statement’s language on inflation could be misinterpreted as a signal that they will advance their timetable for a rate increase, she said. “The risk is the markets would overreact,” Saporta said. “The safest course of action is to leave it unchanged.”

Preferred Gauge

The Fed’s preferred inflation gauge, the personal consumption expenditure price index, rose 1.8 percent in May from a year earlier. Its 12-month gain was as low as 0.8 percent in February. Another measure of inflation, the consumer price index, climbed 2.1 percent in June.

-- Stronger growth: A report today on second-quarter gross domestic product may influence the FOMC’s assessment of the economy, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

GDP rose at an annualized 4 percent rate in the second quarter following a 2.1 percent slump in the first, which is smaller than previously estimated, Commerce Department figures showed today in Washington.

-- Exit strategy: The FOMC will probably continue discussions of its plan for an eventual tightening, including tools for controlling short-term interest rates, said Tim Duy, a professor at the University of Oregon in Eugene and a former U.S. Treasury Department economist.

The committee may announce its “exit strategy” on Sept. 17 after a policy meeting, Atlanta Fed President Dennis Lockhart said this month in an interview. Yellen plans a news conference that day.

Asset Prices

-- Financial stability: Policy makers will probably discuss signs of greater risk-taking by investors, including in the leveraged-loan market, according to Kevin Cummins, an economist for UBS Securities LLC in New York.

Yellen said in congressional testimony on July 16 that prices for equities and real estate have “risen appreciably” and valuations in lower-rated corporate debt “appear stretched.” Still, “threats to financial stability are at a moderate level,” she said.

The Fed probably won’t use monetary policy to curb excessive risk, relying instead on supervision, Cummins said. “It’s something that they are watching, but it’s not necessarily going to filter through to overall policy until maybe it’s too late,” he said.

Fisher at Odds

-- Possible dissent: Dallas Fed President Richard Fisher may cast a dissenting vote, warning that policy is too accommodative, according to Feroli.

Fisher said in a speech this month that, with inflation speeding up and employment “rapidly improving,” he is “increasingly at odds” with some FOMC participants.

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