Fed Calls: We Know What They’ll Say, Just Not How They’ll Say It

There’s little mystery surrounding the Federal Reserve’s rate decision tomorrow. Economists and markets appear certain that the Federal Open Market Committee will keep the federal funds rate at its current 2% target, halting a monthslong cycle of cuts. However, two issues remain unclear: how the accompanying statement will deal with the growing inflation risks and whether there will be any dissents on the vote. This is a roundup of some expectations.

Inflation risks:

Some have suggested that the Fed will indicate that the upside inflation risks now exceed the downside growth risks. We do not believe that the Committee will do so, primarily because we would view that (and probably most everyone would) as a signal of a predisposition to raise rates in August, and we do not think that the Fed is nearly that close to hiking. –RBS Greenwich Capital

Because of inflation concerns resulting from still-high energy prices, it seems likely the Fed will choose to adopt language that suggests more attention to the inflation outlook while maintaining the language highlighting the risks to growth. As a result, the statement is likely to be less a representation of the evolution of the economy than a reminder that the Fed is balancing risks to both growth and inflation, supporting its stance that 2% is the appropriate level for the Fed funds rate. –Merrill Lynch

While we expect the statement to include plenty of references to inflation concerns, we suspect that it will stop short of declaring a formal risk assessment tilted toward inflation. –Morgan Stanley

The Committee is likely to tread carefully around any statement of the balances of risks, as it does not want to feed market expectations that a tightening cycle is about to begin. –Lehman Brothers

The balance of risks has shifted towards inflation since the previous meeting, and the Fed’s press release will highlight these points. –Global Insight

Its closely-watched statement will acknowledge a still weak economy and elevated headline inflation, without tipping its hand as to the direction or timing of the Committee’s next policy move. –Bank of America

The policy statement is likely to be more hawkish—underplaying the downside risks to economic growth and overplaying the upside risks to inflation. This will be the Fed’s attempt to try to manage inflation expectations without actually having to change policy. –Insight Economics

Our assessment of the upcoming monetary statement is that the Fed will take a hawkish turn, but will not provide an explicit indication of a rate hike at the August meeting. We anticipate that the committee will use the pricing paragraph to reinforce their recent tough rhetoric on inflation to shape a change in the balance of risks. While the statement may shade that balance towards inflation, as we think it should, the committee will largely remain in a data dependant position for some time. –Merk Investments

Given recent Fed-speak, greater emphasis will likely be placed on upside inflation risks, although growth will probably continue to be described as weak, with downside risks still apparent. The statement will probably suggest a “tightening bias”, although not one so strongly worded to lead markets to believe that the August 5 meeting will result in an actual tightening move. –MFR Inc.

Policymakers’ collective tone turned in a more hawkish direction recently, so we would not be surprised to see a discernible-but-nuanced sharpening of the inflation rhetoric in the official policy statement, as well. However, we do not believe policymakers are ready to tilt the risk assessment explicitly toward higher inflation. –Deutsche Bank

We look for a view of balanced risks that is likely to be soft-pedaled given the Fed’s own uncertainty. Balanced risks, however, would support the status quo on rates at least through the summer. –Societe Generale

Dissension?

The possibility of a dissent remains, even though dissenting against no move is more aggressive than dissenting against a cut in rates. The most likely dissenters are Dallas Fed President Fisher and Philadelphia Fed President Plosser, who dissented in April. However, President Fisher may take some comfort in the behavior of the dollar since the April meeting. Likewise, President Plosser, who was concerned about the monetary aggregates in April, may take comfort in their recent deceleration. However, either could still dissent as both regions reported negative consumer price developments in the recent Beige Book. –Merrill Lynch

For the first time since last September, we expect no dissenting votes at this week’s meeting. –Bank of America

Hawkish dissents are likely, in line with the last three FOMC decisions. –Lehman Brothers

We don’t anticipate any dissents this time around. –Morgan Stanley

Compiled by Phil Izzo