(Bloomberg) — Here's what to look for when the Federal Open Market Committee releases its policy statement at 2 p.m. Wednesday following a two-day meeting in Washington.
Economists and traders expect the first interest rate increase since 2006, marking the beginning of the end for the unprecedented era of easy monetary policy. The move would come at a time when a commodity slump is causing the market for high- yield bonds to gyrate, sending tremors through financial conditions indexes and spreading unease across trading desks.
While junk bonds linger as a concern, economic conditions finally point to a much-anticipated liftoff in rates: Recent data show that momentum is holding up, with consistent hiring, solid consumer spending and a modest pace of output growth. Inflation remains below the Federal Reserve's 2 percent goal, but as officials from China to the euro area try to stoke domestic demand, international risks loom less ominously in the outlook.
There is a scheduled press conference 30 minutes after the committee's decision is released, during which Fed Chair Janet Yellen can clarify why liftoff from zero is finally warranted — or, in the case of a surprise hold, why it isn't. She'll also be able to lay out a map for future interest rate increases, the next focal point for market participants and economists.
Gradual pace
The best clue on the hiking cycle's slope will probably come from the so-called dot plot — a chart sketching out officials' projections for where rates will be in the future. Market pricing for federal funds futures implies just two interest rate increases next year, fewer than the four that the dots suggested at their most recent release, in September.
"Liftoff is essentially baked into the cake," said Gennadiy Goldberg, U.S. strategist at TD Securities in New York. "But if the Fed capitulates on the four hikes, that would be seen as a dovish hike."
While Fed officials will likely lower their estimates, they are probably not willing to go as far as to reinforce the market-implied projection, said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC.
"I don't think they're eager to force a repricing now, so how do they get out of Wednesday without really upsetting the markets?" Stanley said. "They're going to do what they can to soothe the market."
Officials have pledged to be data-dependent during this tightening cycle, raising rates in response to incoming economic and market information. That means Fed watchers will also be attuned to any clues on what the Fed needs to see to move again, particularly when it comes to price pressures.
Inflation goal
Yellen said during a Dec. 2 speech that the committee will "carefully monitor actual progress toward our inflation goal as we make decisions over time on the appropriate path for the federal funds rate." That statement heightened the stakes: While making a decision about initial liftoff, policy makers had been attuned to forward-looking inflation expectations rather than "actual progress."
The Fed's preferred inflation gauge, the personal consumption expenditures index, stood at 0.2 percent in October, far below the 2 percent goal. Officials have consistently reiterated that once a slump in global commodity prices stabilizes and the dollar stops its year-and-a-half long ascent, inflation should be able to take off at last.
A separate measure of inflation, the consumer price index, firmed to 2 percent excluding food and energy in the year through November, a government report Tuesday showed.
