Hanging fire.

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What the Fed Will Do This Week

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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Federal Reserve officials will paint a mixed economic picture at the conclusion of the two-day meeting of the Federal Open Market Committee that begins Tuesday.

They will welcome a less alarming international context: The recent disruptions in financial markets outside the U.S. have eased, in particular when it comes to the dislocation in emerging economies. At the same time, however, Fed officials will point to a somewhat less robust U.S. economy in which solid job creation and slightly higher inflation are offset by weaknesses elsewhere.

QuickTake The Fed's Countdown

The central bank will take note of the loosening of overall financial conditions brought about by the broad-based recovery in global markets. And although some officials worry in private about the threat of excessive risk-taking and its consequences for future financial stability, these concerns are unlikely to be reflected in the FOMC statement.

The Fed will acknowledge that a few other influential central banks remain focused on additional liquidity injections, as was indicated by Chinese policy actions last week and the signals emitted by the European Central Bank. But, in contrast to prior occasions, the U.S. institution will shy away from expressing concern about the prospect of an appreciation of the dollar.

In all this, the Fed will refrain from taking any new policy actions. It won't  increase interest rates, and it certainly won't embark on a new program of large-scale purchases of securities.

Yet, in response to markets that are now more convinced that the first rate hike in 10 years will be delayed until next year, the Fed will make a point of signaling that its December meeting is still “live,” maintaining maximum decision-making flexibility. That will be made clear through the reiteration of the message that the central bank's decisions remain data dependent.

Although the Fed probably won’t be as assertive as I think it should be, officials will also make an effort to shift the markets’ attention away from a single-minded fixation on the timing of the first rate hike. Instead, central bankers will push markets to pay much greater attention to the scope and duration of an interest-rate hike cycle that is likely to be very gradual, far from automatic and will end with a rate that is below historical averages.

Finally, given reports of a divided FOMC -- reflected not only in the unusual divisions between regional presidents and board governors, but also in some recent public statements pointing to differences among the governors themselves -- officials will do their utmost to portray a more united front. In the process, they will work hard to minimize differences, particularly when it comes to dissenting in voting.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net