Hold on Tight... Fed Day Could Bring a Number of Changes

The FOMC wraps up its 2-day meeting today and is expected to deliver its policy statement at 2PM ET. The meeting and subsequent press conference is considered very important by market watchers as the Fed is expected to make a number of changes which could have widespread ramifications on asset prices.

Economists at Nomura expect to receive another round of FOMC forecasts for the first time since June, which they say will incorporate significant new data. The forecasts should also be extended to 2017, thus giving a better sense of how the participants judge the current balance between actual and potential output.

They also expect the Fed to make changes to its forward guidance. "At a minimum, we expect the FOMC to add language that stresses the “data dependence” of future interest rate decisions," they said. They expect the FOMC will continue to state that the adjustment of interest rates, when it comes, will be “balanced” and that it expects interest rates to converge to normal levels more slowly than employment and inflation. However, "in the light of the sustained improvement in labour market performance, and the inherent complexities in assessing their state, we expect the FOMC to drop its assessment that “lift-off” is still a “considerable time” away."

Nomura said these change reflect the progress of the US recovery. The changes are also easier to make because the current state of financial markets - stable long-term interest rates and resilient financial conditions - gives the FOMC some comfort that it can take another step towards normalizing policy without an outsized impact on the economy.

"Although we expect substantial changes to the FOMC’s forward guidance, we do not think that the FOMC will want to send a signal that a “lift-off” is imminent. In this context, we continue to believe that the most likely timing for the first interest rate hike is June 2015. However, recent developments in US monetary policy have shifted the risk around our call forward."

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