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Once the Fed pulls the trigger on its first rate cut in more than a decade, the markets will quickly move on to anticipating the next one.
The Fed is widely expected to announce a 25 basis point interest rate cut when it releases its statement at 2 p.m. ET Wednesday. The Fed's language in its statement and later at Chairman Jerome Powell's 2:30 p.m. news conference set the stage for expectations. Many strategists believe the Fed will signal it is open to more easing but not promise when or how much.
"I'm looking for some version of 'we will remain prepared to act as appropriate unless inflation returns or there's a resolution of some of the broader global uncertainties,' something to that effect. If they are willing to do that, that will be considered a soft commitment to continue easing," said Ian Lyngen, head of U.S. rate strategy at BMO. "At every meeting so far this year, I thought there's no way the Fed could be more dovish than the market is expecting, and at every meeting I've been wrong."
The Fed is also expected to announce it will end the "quantitative tightening" program to roll down its balance sheet, and once more buy securities to replace those that are maturing. The program is expected to end in September, and strategists say the Fed will appear hawkish if it does not stop a program that results in "tightening," at a time when it is "easing," or cutting rates.
"I think by doing it, they look dovish, and they want to be as dovish as possible," said John Briggs, head of strategy at NatWest Markets.
Going into this week's meeting, laying out its policy objectives has become trickier for the Fed, since it has broadcast an interest rate cut to financial markets at a time when the U.S. economy is not clearly in a downward spiral. It has also removed its long running use of "data dependency" as the main driver of its policy actions.
"I think if they wanted to sound very dovish, they would acknowledge that risks are skewed to the downside, and they continue to monitor risks, in particular, from abroad. They could say that inflation expectations are low and well below the Fed's 2% objective," said Mark Cabana, head U.S. short rate strategy at Bank of America Merrill Lynch. "I just don't think it's going to come through in the statement. There's only so many words they can use. It's going to come through the press conference. Powell is going to say things are highly uncertain."
The Fed has said it wants to take appropriate action to extend the economic expansion, the longest ever as of this month. It also has said it is concerned by uncertainties around trade wars and slowing global growth and the fact that inflation is stubbornly below its 2% target.
"The statement, in a lot of ways, is formulated. You can't get a lot of nuance," said Briggs. "You can change a couple of words. You can talk about risks to the downside, but I think expanding on that and just how worried they are — a little worried or very worried— you can't get that in the statement. It's about the future now. If they only go 25, it's only about the future."
It's difficult to say how much the uncertainties from trade wars and the global slowdown are affecting the Fed's dual mandate on inflation and employment.
"Low employment and 2% inflation is their mandate. They're hitting one and missing the other. They need to hit it," said Briggs. For that reason, the stronger U.S. data becomes less relevant. "They're not cutting because of decent U.S. data."
In its last statement, the Fed said it continues to see a sustained economic expansion, strong labor market and inflation near its 2% objective, but there were also increasing uncertainties. The market is paying close attention to a sentence in the statement where the Fed said it "will closely monitor implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion."
"They're monitoring it closely. That was a signal that meant July" in the last statement, said Diane Swonk, chief economist at Grant Thornton. She said the Fed probably does not want to be locked into a date, due to uncertainties, including around Brexit — the U.K.'s anticipated exit from the European Union.
"It doesn't necessarily mean it's going to be at the next meeting. They could balance it. It depends how far they want to go," she said. "There's a risk of them making it too much of a slam dunk September cut to follow this."
Swonk also said the language in the statement should be less informative than Powell, particularly if the Fed was wrangling over the language and there was a concern it could trigger a dissent from one or more members of the Federal Open Market Committee. The market is already anticipating at least one dissent, possibly from Boston Fed President Eric Rosengren, who said he didn't see a need for a rate cut. Another dissenter could be Kansas City Fed President Esther George.
Economists and strategists say dissenters will carry their own message. It's common for one member to disagree with the committee's vote, but two or more would disturb the market and make it more difficult to understand future policy.
Tom Simons, money market economist at Jefferies, said the Fed could add some language to the statement. "We also expect a nod towards the unresolved 'government policy issues' that continue to cloud the economic outlook, which Chairman Powell noted in his testimony before Congress in June. The statement will repeat the guidance that the FOMC will 'act as appropriate to sustain the expansion,'" he wrote in a note.
But the real signal could come in any new language from Powell, who was first to discuss the Fed's interest in preserving the economic expansion, a departure from past stated Fed objectives.
"If he were to say he still thinks more prevention is prudent, assuming uncertainties in the outlook are not resolved, that's very dovish," said Cabana.
The markets are also focused on another sentence where the Fed said "in determining the timing and size of future adjustments to the target range for the federal funds rate," it will assess economic conditions, relative to its employment and inflation objectives. If the Fed alters that in any way, replacing "adjustments" with another word, such as "accommodation," it would also be a signal on rate policy.
Strategists also expect Powell to be asked about the continuing criticism by President Donald Trump, and he is expected to once more defend the Fed's independence and reiterate that he expects to serve his full term.