Economists say the statement to accompany the FOMC's rate decision on Tuesday will continue to strike a neutral balance between the Fed's dual mandates, giving the central bank as much flexibility as possible to continue monitoring data without feeling constrained to raise rates too quickly.
From September 2007 to April 2008, the FOMC cut the Federal funds target rate by 325 basis points to 2.00%. The most recent meeting on June 25 was the first time the Fed decided to keep rates on hold, a decision they are widely expected to repeat on Tuesday.
Even though the rate decision is likely to be the same, the usual scrutiny of the policy statement should be of value to determine the longer-term outlook of the Fed.
"The expected inaction doesn't mean the market won't be interested in the meeting's outcome. On the contrary, interest will be as high as ever because of the uncertainty surrounding the wording of the policy directive," said Patrick J. O'Hare from Briefing.com. "We think there is increased potential that the market will perceive a comforting message that the Fed won't be hiking interest rates anytime soon."
Aside from the rate decision itself and the tally of votes, the template for the statement is essentially a three-paragraph press release focusing on the outlook for growth, inflation, and monetary policy.
Ian Lyngen, government bond strategist at RBS Greenwich Capital, commented that, "In light of the progression of the data and statement, we are skewed for some moderation of the statement's language, perhaps refocusing on the prevalence of risks to both growth and inflation - returning to a more balanced read - if there are any changes at all."
In the June 25 statement on growth, the key phrases were that "overall economic activity continues to expand;" "financial markets remain under considerable stress;" and "tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weight on economic growth over the next few quarters."
The key statements on inflation were that "[t]he Committee expects inflation to moderate later this year and next year;" and that "uncertainty about the inflation outlook remains high."
RBC senior currency strategist Matthew Strauss said Tuesday's statement will likely echo comments made by Chairman Ben Bernanke on July 16, namely that "the possibility of higher energy prices, tighter credit conditions and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth."
Strauss called that phrasing a more downbeat assessment than the June 25 statement, but said a more dovish statement could be offset by one or two additional dissenting voices.
At the previous meeting, only the Dallas Fed's Richard Fisher called for a rate hike. Fisher hasn't made any public statements since that meeting, but many expect his views haven't altered over the past six weeks. Other potential dissenters are hawks such as Charles Plosser of the Philadelphia Fed, or Gary Stern of the Minneapolis Fed.
The June 25 paragraph on monetary policy was widely received as a neutral, balanced outlook. The FOMC said the easing of interest rates and measures to inject liquidity in the market should promote moderate growth over time. "Although downside risks to growth remain, they appear to have diminished somewhat," the statement said, while noting that "upside risks to inflation and inflation have increased."
Economists from Barclays Capital expect that Tuesday's statement "will omit the phrase indicating that downside risks to growth had diminished, since we do not believe the Committee will perceive a significant further decline in these risks since June."
They said the overall tone of the statement should be neutral and consistent with the Fed holding rates at 2.00% over the next several meetings.
TD Securities economist Millan Mulraine added that the Fed may attempt to release a less hawkish statement in order to temper market expectations for rate hikes later in the year.
The FOMC will announce its rate decision Wednesday at 2:15 p.m. EDT.
By Patrick McGee and edited by Stephen Huebl