Is there anything the Fed could say to rock the market? Maybe this tweak

[thenews]

The Federal Reserve has a choice to make this week, whether or not to attempt to shake markets out of their complacency by highlighting that the first rate hike may come sooner than expected or that rates could rise faster than expected.

After all, Fed Chairwoman Janet Yellen already said as much in her testimony to Congress earlier this month.

“If the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned. Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated,” she said.

Yellen’s comment seemed to get lost, with only some Fed watchers highlighting it.

“You might think this is a statement of the obvious, but she did not make this point in her February testimony and neither does it appear in the FOMC statement,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said at the time.

Putting it in the statement would get it noticed, economists agreed.

Lewis Alexander, U.S. chief economist for Nomura Holdings, said there was a certain logic to the Fed adding this language to its policy statement, but said the Fed would be playing with fire if it added it.

“It is hard to craft it in a way so it is seen as neutral,” Alexander said. Even if the statement was two-sided, “people are going to focus on one side,” in other words, higher rates sooner.

Laura Rosner, economist at BNP Paribas in New York, said markets will be sensitive to the smallest of tweaks in the statement.

On the other hand, minutes of the last Fed meeting show the Fed was uneasy over the market’s complacency.

Michael Hanson, a senior economist for Bank of America, said adding the language is possible but doubtful.

“I am skeptical the Fed is going to intend to send a more hawkish signal” that the threshold for the first rate hike has been lowered in some way, he said.

“The market would react quite strongly [and] the Fed doesn’t want to introduce volatility for its own sake,” he said.

Joseph LaVorgna, chief U.S. economist at Deutsche Bank, echoed the view of many economists when he said the Fed will be patient at this week’s meeting and save any tougher language for a rewrite the statement at the next meeting in September.

“If the Fed (and Yellen) is going to make a change in rhetoric, it is likelier to come at the September 16-17 FOMC meeting because that is the next time the Fed updates its forecasts and holds a press conference,” he said.

So overall, Wall Street economists are expecting a quiet Fed policy meeting this week, with the statement only changed to reflect the recent economic data. That statement is due Wednesday at 2 p.m. Eastern.

The Fed is expected to reduce the monthly pace of its bond purchases by another $10 billion to $25 billion, and signal that it intends to end QE3 in October.

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