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Eight keys to Fed's September meeting

MARKETWATCH 8:21 AM ET 09/17/14

WASHINGTON (MarketWatch) -- This week's Federal Reserve meeting is perhaps the most closely-watched gathering of the year as the U.S. central bank prepares the groundwork for an eventual liftoff in interest rates.

There are several moving parts for investors. Here are eight things to watch for clues on when the central bank might a liftoff of short-term interest rates and what the tightening cycle might look like.

The Fed will release its policy statement and economic projections at 2 p.m. on Wednesday. Fed Chairwoman Janet Yellen will follow up with a press conference at 2:30 p.m.

Interest rates:

No change here. The Fed will keep its target fed funds rate in a range between zero and 0.25% . where it has been since December 2008.

Asset purchases:

For the seventh straight meeting, the Fed is expected to taper its bond buying program by $10 billion, bringing QE3 down to only $15 billion per month. The central bank might decide to remove language from the statement that asset purchases "are not on a preset course" as officials have signaled they intend to end the program after at the Fed's next policy meeting on Oct. 28-29.

Forward guidance:

The biggest potential change for the market would be any change to the Fed's pledge to keep rates low for a " considerable time" after the central bank ends its asset purchase program, expected in October.. Any change in this pledge at this week's meeting would be a sign "as the start of the countdown to policy tightening," said Millan Mulraine, economist at TD Securities. Several economists noted that, in recent years, the Fed has dropped key phrases six months prior to changing policy. Many economists, including Michael Gregory of BMO Capital Markets, said the Fed might compromise and tweak the language to point to no hike until several economic factors are met. But Vincent Reinhart, chief U.S. economist at Morgan Stanley, said other words won't soften the blow. "The whole point of cutting the commitment language is to cut the commitment language," he said. It would be a sign that the Fed can no longer rule out tightening as early as March, he said.

Description of labor market:

Analysts will be watching closely to see if the Fed repeats its concern that there is a "significant underutilization of labor resources." With the August job report surprisingly weak, most Fed watchers think there is no burning need to change this description.

Dot plot:

Following the meeting the Fed will release an updated "dot-plot" showing where each member thinks is the appropriate target Fed funds rate at the end of 2015, 2016 and for the first time 2017. The current median is for rates of 1.13% at the end of 2015 and 2.5% at the end of 2016. Michael Hanson, economist at Bank of America Merrill Lynch, said there is a good chance that there will be upward drift in the 2015 and 2016 dots. He expects the median dot for 2017 to be in the 3.25% to 3.5% range, just below the 3.75% long-run funds rate. "The risk is for markets to push rates up, particularly on the short end of the yield curve, in response to the dots.

Economic projections:

The Fed will be updating their economic projections for 2014 and 2015. Paul Ashworth, economist at Capital Economics, said the Fed might lower its mid-June 2014 unemployment rate forecast slightly from 6.0% to 6.1%. But the Fed's forecast of growth and inflation this year seem about right. The Fed is forecasting 2.1% to 2.3% real GDP growth this year and for inflation, as measured by the personal consumption expenditure index, to average 1.5% to 1.7%. "With little pressure to change their 2014 projections, we see no reason why officials would want to make any revisions to their 2015 forecasts either," Ashworth said.

Exit strategy:

The Fed could agree on, and publish, an update of their exit principles. The Fed last published these principles in June 2011. The Fed has operational questions to decide like how it can hike the fed funds rate with such a large balance sheet. Other issues include whether to stop reinvesting proceeds of maturing assets and whether to sell assets from its balance sheet.

Press conference:

If markets decide that the Fed has been hawkish, look for Yellen to push back during her press conference, to start at 2:30 p.m. For instance, if the forward guidance changes and the market reacts as if that means a hike will happen sooner than next June, "expect Yellen to give that notion a thorough thrashing," said Tom Porcelli, chief U.S. economist at RBC Capital Markets.

-Greg Robb; 415-439-6400; [e-mail]

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09-17-140821ET
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