Not a single contrarian voice exists among the 101 economists surveyed by Bloomberg for Wednesday's U.S. rate announcement from the Federal Open Market Committee. All agree that the Fed will hold rates at 2.00%, which means the focus will turn towards the accompanying statement to look for insight as to whether the Fed is thinking of hiking rates later this year, economists say.
Paul Ashworth, U.S. economist at Capital Economics, said hawkish statements from the Fed in early June created expectations that the FOMC would raise rates at this meeting and continue hiking another two or three times before the end of the year.
But such expectations were quelled when unnamed officials from the Fed, commenting in reports printed by the Washington Post, the Wall Street Journal and the Financial Times early last week, said markets were getting carried away.
Last Monday, Fed funds futures were pricing in a 26% chance of a rate hike on June 26 and a 68% chance of a hike in August. Once officials indicated markets has misinterpreted hawkish statements, expectations for a rate hike fell sharply. As of this posting, markets are currently pricing in a 10% chance of a rate hike on Wednesday and a 39% chance of a rate hike on August 5.
"It would be a major surprise if the Fed moved rates either way," Ashworth said. He noted the stock market has fallen back in the last few weeks to levels not far above the lows hit during the Bear Stearns liquidity crisis, adding that while the Fed is worried about a wage-price spiral, the economy is "far too weak" to combat inflation just yet.
Ashworth said the Fed doesn't generally raise interest rates if the economy is seeing fewer than 100k job gains per month, so it would be "unprecedented" for the FOMC to raise rates now, as the economy has been losing jobs for five consecutive months. Moreover, he said the housing market is "worse than anyone could have predicted."
Meny Grauman, an economist at CIBC, said signals have been very strong and the Fed has been quite clear about communicating their intentions, so "it's pretty certain" that rates will be kept at 2%.
Grauman said the risk for the Fed is to signal too strongly that they will tighten rates later on, so to compensate they will give themselves breathing room and keep the statement balanced.
He said the Fed doesn't like surprises, so the more transparent they can be the better off the market is. "The fact that they went through the trouble of correcting market perceptions means [that hiking rates] wouldn't just have a negative impact, it would be a hit to their credibility."
Brian Bethune, chief U.S. financial economist at Global Insight, said the press release will be important to set the tone for the markets. "It's a policy statement rather than a speech," he said, adding that he expects a continuation of the wait-and-see approach with slightly more stress on inflation.
"It would be rather inappropriate for them to signal any change in policy," Bethune added, noting that the recent hawkish tone from the Fed "has to some extent put the cat among the pigeons," causing disruption in the markets that the Fed still has to calm.
Ashworth said it's unlikely the Fed will go so far as to put a bias towards tightening in the statement, saying it would more likely portray the Fed as "slaves to development," or in other words, that future decisions will be dependent on upcoming data.
Ashworth said the definitive outlook doesn't mean that the decision will be unanimous, however.
"We know there is an extreme hawkish element on the Committee, but there's no indication they'll turn into a majority," Ashworth said. He said one or two officials may call for a rate hike, but given that no decision has been unanimous since September, markets will expect some dissent, he said.
Up until now, the Fed has been cutting rates and dissent came from hawks who sought to keep rates still, added Grauman. He said dissent has a different flavour in the coming meeting, however, and opposing a decision to keep rates steady could be seen more as a vote of no-confidence. That would be "much more serious," he said, noting that the argument for raising rates isn't justified, while previous dissent to stay on hold was.
The dissenting voters in the last meeting, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher, may call for a rate hike on Wednesday, according to Bethune, who was uncertain if dissenting votes in this statement would be more significant than in previous decisions.
Bethune said Chairman Ben Bernanke has given the FOMC "a lot of rope," which has created a situation that is "a little dangerous right now" because dissent connotes instability.
"The whole process is very unstable; where that takes us is anybody's case," he added.
Bethune said the past two weeks have shown how damaging uncertainty can be, so the Fed is likely to be conservative and balanced in the statement. "Worst case scenario is you get the same two dissenters," he said, whereas a unanimous vote could heighten the Fed's credibility and coherence.
The decision and accompanying statement will be released Wednesday at 2:15 p.m. EDT.
By Patrick McGee and edited by Stephen Huebl