FOMC Announcement Preview

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FOMC Preview

Despite the official end of QE, this meeting should go generally according to plan, although there are 4 key areas where potential surprises are lurking. From a market standpoint, the FOMC is expected to be “dovish,” so most of the surprise risk is on the “hawkish” side (although it’s admittedly remote).

There are four keys to watch for in today’s FOMC announcement:

  1. End of QE: Despite Fed President Bullard’s comments last week about potentially halting the tapering of QE due to global economic weakness, it is universally expected (and priced in) that the FOMC will end QE at this meeting. To say it would be a dovish shock if they did halt the taper would be an understatement.
  2. Potential Removal of “Considerable Time”: This phrase and its potential removal was in focus at the September meeting. Basically, “considerable time” is thought to mean 6 months. So, if/when this phrase is removed from the statement, it’s anticipated that rate hikes will begin 6 months later. Given that it’s October, 6 months from now is March, which is earlier than current market expectations for rate “lift-off.” Expectation: “Considerable Time” will remain in the statement. Surprise Potential: Hawkish. If the phrase were removed, it would be a “hawkish” surprise with stocks, bonds and gold falling while the dollar rises.
  3. Potential Removal of “Significant Underutilization of Labor Resources”: This is the other key phrase to watch. This refers to the slack in the labor market, and a removal of this phrase would imply a material upgrade to the jobs market. This would be “hawkish.” Expectation: The phrase stays or may be slightly modified—but not removed totally. Surprise Potential: Hawkish. If “significant underutilization of labor resources” is removed entirely, it’ll be a hawkish surprise with stocks, bonds and gold falling while the dollar rises.
  4. Downgrade of Inflation: Starting in July, the FOMC basically upgraded its outlook on inflation, saying that it was moving toward its 2% goal and that downside risks to inflation had been diminished. But, given the recent drop in CPI, it’s possible the FOMC may re-insert some cautious language on inflation. It could say something like “inflation consistently below 2% poses a risk to economic performance, and the Committee will carefully monitor inflation going forward.” Expectation: It seems like the FOMC could re-insert cautious language about inflation. Surprise Potential: Dovish. This shouldn’t elicit too much of a market response, as we’ve already largely priced in a dovish meeting, but expect the dollar to sell off and bonds to rally (and stocks to rally modestly also) if the Fed again sounds cautious on the inflation front).

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