The key policymaking committee of the US Federal Reserve Board meets in Washington today and tomorrow – or at least as many as possible will make it in person, after the major snowstorm, with the rest dialing in to participate. It may not be an entirely comfortable gathering.
The Fed increased interest rates in December for the first time since 2006, but the strengthening of the economy it had expected since then has not appeared, or at least has been patchy at best. And the international markets have had a turbulent start to the year, even if a rally on Thursday and Friday of last week did put a slightly better shine on things.
In the old days, central banks liked to tell the markets as little as possible about what they were thinking. Former Fed chairman Alan Greenspan made a career about being obtuse, once famously saying: “If I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.” Now times have changed and central banks are expected to give regular “guidance” so that the markets know what to expect and are not surprised.
This is more transparent, but it does make it more difficult for central banks to change course, because they have to admit that they were wrong.
And this is the dilemma facing Fed chair Janet Yellen and her colleagues on the Federal Open Market Committee. They previously led the market to expect that there would be four more quarter point increases this year, and investors had expected the next one to come in March. Now nobody is sure, and the average expectation is for perhaps two more rises this year, with the next one not coming until June.
The Fed will almost certainly not change rates this week, but every line of its post-meeting statement will be parsed for hints of what is to come. Will they signal that rate increases will be slower in future? And will they follow ECB president Mario Draghi, who clearly indicated last week that the ECB was concerned about low growth and low inflation, a point he reiterated last night. If there is one thing that could move markets this week it will be what the Fed says.
