Why There’s More To This Week’s Fed Meeting Than Meets The Eye by Jeffrey Rosenberg, BlackRock
The rocky start to 2016 has led some to wonder what the Fed will say during its “off-cycle” meeting this week. Jeffrey Rosenberg shares three potential scenarios.
Losses in global stock markets and continued declines in oil prices to start the year put more importance on the January FOMC meeting than usual.
The “off-cycle” FOMC meetings (January, April, July and October) contain neither a scheduled press conference nor an update of the Fed’s economic forecasts and FOMC participants’ viewpoints as to the path of Fed policy and economic outcomes. As such, market expectations for any signaling of policy change coming around these meetings is usually small.
Furthermore, coming off of the highly anticipated “lift-off” meeting of December of last year that provided a long anticipated change in policy direction, bond market participants hold little expectation for any follow-up policy move in January. Instead, the market expects any policy action at the earliest in March. However, with this year’s rocky start, we are keeping a close eye on what the Fed will say this week, and see three potential scenarios for the central bank’s response:
- The “Thread the Needle” outcome, which is probably idealized from the Fed’s perspective. In this scenario, the Fed both acknowledges the impact of recent declining oil prices on the near term inflationary outlook, along with the impact of financial market conditions, in a manner that assures investors that they are paying attention to market events without overreacting to them. Ideally for the Fed, a muted financial market response results from the balance between these two extremes.
- The Fed replays its September 2015 FOMC statement reaction to market concerns, returning to something of the language used then that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” The intent in September was to reassure markets that the Fed was paying attention to the implications of financial market developments. A recognition this time would be similarly motivated. Coming so soon however after announcing “lift-off” we doubt the Fed takes this course of action. Further arguing against this course of action is that the Fed may well remember that these attempts at reassuring the market of its monitoring of developments backfired and heightened financial market uncertainty.
- The Fed downplays recent market volatility and re-emphasizes the conditions and outlook for policy rate normalization. That would be reminiscent of the October 2015 FOMC Statement last year. With some stabilization in markets, the Fed surprisingly quickly excised its concerns for “recent global economic and financial developments” and their ability to “restrain economic activity” and instead characterized the outlook for economic activity and the labor market as “nearly balanced but is monitoring global economic and financial developments.” In that case, the market reaction was both higher interest rates and continued increases in stock prices.
In contrast to the month of stability in financial markets last October, the Fed has seen only two days of “stability” late last week. That might argue against this scenario for reiterating the normalization, making this scenario less clear cut.
Clearly the first option is the preferable one. Whether the Fed can deliver it remains in doubt, and that likely won’t resolve the doubts hanging over financial markets this week either.
Jeffrey Rosenberg, Managing Director, is BlackRock’s Chief Investment Strategist for Fixed Income, and a regular contributor to The Blog.