Language shift from “considerable time”
The big expectation for the conclusion of the Federal Reserve’s Federal Open Market Committee meeting is for a shift in language. The FOMC is expected to drop the phrase “for considerable time” in reference to maintaining near-zero rates in favour of an emphasis on patience.
As part of the Fed’s reliance on forward guidance (something ushered in by Janet Yellen when deputy chairman of the Fed), the Fed has repeated the statement that “it likely will be appropriate to maintain the 0 to 0.25 percent target rate for the federal funds rate for a considerable time” after the end of its asset purchase programme – with the “considerable time” emphasis something that has been in place since 2012.
Fed funds rate hike expectations
90-day Eurodollar implied probabilities of a Fed funds rate hike is being priced around mid-2015 in line with conservative consensus expectations from the majority of the big bank forecasts, however, we may see this being pushed later into the third quarter of 2015, with the Fed seemingly in no hurry to abandon its current ultra-loose monetary conditions despite an official Fed forecast of 2.8 percent GDP growth in 2015.
Inflation to be downplayed
The Fed is also expected to downplay declines in inflation in view of recent sharp declines in oil prices – something that should be seen as a net positive to the economy with consumers left with more disposable cash in their pockets thanks to downward pressure on fuel prices.
Improving labour market in focus
Instead, the FOMC is likely to take an upbeat view on the current labour market situation after the last US non-farm payrolls data showed an increase of 321k jobs – the largest increase in three years, while the jobless rate is at 5.8 percent and edging closer to the Fed’s 5.2-5.5 percent target estimate for full employment.
Chart: US unemployment, month-on-month non-farm payrolls, inverted ADP initial claims
The Fed will release its interest rate decision with accompanying monetary policy statement at 19:00 GMT on Wednesday 17 December