While it is unlikely that the Fed will move on interest rates at 2:15 p.m. ET, it could make a shift towards a more hawkish stance. Economists at Scotia Capital outlined five things to watch for. The first three are considered most likely for Tuesday’s FOMC meeting.
- Removal of the term “extended period.” This could be replaced with “some time” in reference to the period the Fed plans to keep borrowing costs at exceptionally low levels.
- If “extended period” remains in the statement, Kansas City Fed President Hoenig will likely dissent again. St. Louis Fed President Bullard could do the same. However, if there is a wording change that provides the FOMC with more flexibility in terms of the timing of rate hikes, there will more likely be a return to unanimity.
- There could be firming wording on the expiry of the US$1.25-trillion agency mortgage-backed securities purchase program, which is expected to be complete by the end of the first quarter.
- Given that emergency rates are no longer necessary, the statement may not include the term “exceptionally” from “exceptionally low levels.” It could be replaced with “highly accommodative” or something else that gradually shifts the statement towards a more hawkish tone, rather than removing it entirely.
- The FOMC could include a more upbeat assessment of the economy as a result of strong data of late. This will likely be offset by further reservations about the U.S. housing market, but tone should be more optimistic.
Even just a few of these changes would bring the FOMC closer to the first rate hike, Scotia told clients. While it continues to expect that will come in the third quarter, the economists said the risk is now tilted to the fourth quarter, partly to allow the Fed the time to remove all unconventional stimulus before changing administrative rates.