Crescenzi: What to Expect from the FOMC Today

FOMC statement & press conference possibilities:

Keep in mind these three top objectives of post-FOMC press conferences:

Control inflation expectations amid today’s extraordinary degree of monetary accommodation

(Eventually) Limit damage control from a future reversal of policy

Guide market expectations about current and future unconventional policy actions

Here are possibilities for today's FOMC statement and post-meeting press conference:

GROWTH ASSESSMENT: Tone, Theme to Expect:

  • Recovery continuing at a moderate pace, albeit at a rate that is uneven and slower than expected
  • Slowdown transitory; growth will pickup somewhat in 2H
  • Labor market moderating, or “improving gradually”
  • Household spending and business investment continue to expand

Key Signals:

Bernanke speech on economic outlook (6/7):

  • “with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year.”
  • “I expect hiring to pick up from last month's pace as growth strengthens in the second half of the year, but, again, the recent data highlight the need to continue monitoring the jobs situation carefully.”
  • “The business sector generally presents a more upbeat picture. Capital spending on equipment and software has continued to expand, reflecting an improving sales outlook and the need to replace aging capital.”

Dudley (6/10):

  • Soft patch is “transitory”
  • “I anticipate that economic growth will pick up enough in the second half of 2011 to sustain a moderate economic recovery"

INFLATION CHARACTERIZATION: Tone, Theme to Expect:

  • Modest risk of alteration of the oft-repeated line (since last September): “measures of underlying inflation continues to be somewhat low relative to levels”consistent with the Fed’s dual mandate. Low PCE relative to CPI may delay any change.
  • Acknowledgment of recent decline in the prices of energy and other commodities
  • Inflation expectations stable

Key Signals:

  • Core CPI inflation was +1.2% y-o-y at April meeting; now +1.5% and +2.5% annual rate y-t-d (the whites of inflation’s eyes?)
  • But…core PCE inflation +1.0% y-o-y; +1.5% annual rate y-t-d.
  • The 5-year/5-year gauge of inflation expectations (it gauges where 5-year inflation expectations are for five years from now, for a total horizon of ten years -- it is one of the Fed's top gauges of inflation expectations) is at lowest since October (2.70% versus 2.95% at April meeting)

UNCONVENTIONAL POLICIES Tone, Theme to Expect:

  • Worsening tradeoffs augur “watchful waiting” in Q3; no serious discussion of new action unless rebound fails to materialize
  • The Fed will hold its balance sheet steady and continue its reinvestment policy. It may use language it used August in this regard and also reiterate it will adjust the level of its balance sheet as needed
  • FOMC minutes for today's meeting may detail other potential policy actions (“extended extended,” extend duration of SOMA, lower IOER, cap rates) but will avoid creating high expectations and it will be a soft discussion

Key Signals:

  • Bernanke post-FOMC press conference comment: “tradeoffs getting less attractive at this point.”
  • Inclusion of “extended period” language indicates “at least two meetings” before the sequencing of tightening begins

FORWARD RATE GUIDANCE Tone, Theme to Expect:

  • The Fed will repeat the three conditions by which ZIRP will be maintained for an “extended period.” The Fed has cited these three conditions since September 2009. Extended period” has been cited since March 2009. (“some time” was used for two meetings prior)

Key Signals:

  • All three conditions (“low rates of resource utilization, subdued inflation trends, and stable inflation expectations”) still exist and the Fed has given no indication it is set to change policy

FOMC FORECASTS Tone, Theme to Expect:

  • 2011 growth forecast of 3.1% to 3.3% will be lowered to under 3%
  • 2012 growth forecast of 3.5% to 4.2% may fall a tad
  • Core PCE forecast of 1.3% to 1.6% likely increased slightly.
  • Forecast for 8.4% to 8.7% 2011 unemployment to increase slightly; little change likely for 2012 forecast of 7.6% to 7.9%.

Key Signals:

  • Numerous economic data point to an economic slowdown
  • Federal Reserve officials have broadly acknowledged the slowdown
  • Expectations for 3.0% to 3.5% 2H 2011 growth will sustain the Fed’s elevated growth forecasts for 2012
  • Reserve bank presidents have indicated greater concern for the inflation outlook

Tony Crescenzi is Senior VP, Strategist, Portfolio Manager Pimco. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."