The key issue for this week is the degree to which the FOMC acknowledges, in its statement, that circumstances have changed and consequently its expectations for policy have changed(after raising rates for the first time in December, we did not expect the FOMC to raise or lower rates at the very next meeting).
We believe the shortfall in economic data and the tightening of financial conditions are too significant for the FOMC to ignore. We think these unexpected circumstances will be reflected in the FOMC statement in a number of ways.
First, we expect the FOMC to note that incoming data suggest economic growth has slowed.
Second, we expect the FOMC to suggest that recent declines in oil prices are likely to delay the recovery of inflation back to the FOMC’s 2% target.
Third, we expect the FOMC to state that it is monitoring foreign and financial developments, in addition to inflation, as it considers future policy changes.
Finally, we expect the FOMC’s forward-looking assessment to acknowledge that the balance of risks has become more adverse. However, we do not think the FOMC will change key policy language or send an explicit signal about the likelihood and/or probable timing of future policy changes. In effect, we think the FOMC will use its assessment of recent developments and the balance of risks to signal how its expectations for policy are evolving, rather than addressing the outlook for policy directly
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