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FOMC Meeting On The Radar: Interest Rate Rises May Start Later Than Thought

The U.S. Federal Reserve meets this week and the focus will once again revolve around the timing of its next interest rate increase. Important housing data and GDP update for the fourth quarter will highlight this week’s economic calendar.

The year’s first meeting of the policy-making committee of the United States Federal Reserve will start Tuesday and end Wednesday with a statement of any policy changes.

Policy makers are not likely to announce any new moves but the FOMC is expected to shift its language on the timing of rate hikes to offer investors with a clear sign of when the Fed is going to lift rates from a record low.

Most analysts are of a view that the Fed is on track to begin raising rates in mid-2015 so it can be expected that lawmakers will start making it more clear at either the January meeting or its meeting next month.

Morgan Stanley believes that FOMC members are likely to do little at this week’s policy-setting Federal Open Markets Committee meeting, despite “a rapidly changing outlook for inflation and inflation expectations.”

Analyst Ellen Zentner said “How high is the Fed’s bar for defending its 2% longer-run goal for inflation? Would the Committee be willing to alter the annual statement to include a more terse defense of it (something that was discussed at the October meeting of the FOMC)? Is it willing to revise the January meeting statement to sound a more worrisome tone on inflation expectations? Fed rhetoric leading up to the January meeting suggests participants are not yet ready to admit defeat regarding a mid-year rate hike. If that is the case, Fed Chair Janet Yellen’s next opportunity will be the semiannual Monetary Policy Report to Congress in February.”

“We think the FOMC will be reluctant to make changes to the statement that might influence expectations for Fed action, particularly when there is no press conference to explain any ‘meaningful’ additions or deletions to the text,” said Michelle Girard, chief U.S. economist at RBS Securities, in a note to clients.

Economists at RBS, Goldman Sachs and Wrightson ICAP are now expecting the first Fed move in September compared with prior forecast of June.

Financial markets have been widely expecting a rate hike in March or April. But with U.S. inflation still below the Federal Reserve’s annual 2% target, Zentner argues that the central banks “faces a conundrum of credibility in its mid-year guidance, and markets are expressing their skepticism by pushing out rate hike expectations slightly beyond September.”

She said “Regardless of what the Fed’s outlook shows, core inflation leading up to mid-year will be moving in the wrong direction at a time when they are saying it’s appropriate to raise rates.”

Earlier last week, Federal Reserve Bank of Boston President Eric Rosengren he won’t go for increasing short-term interest rates until the 2 percent target is maintained in a stable manner.

But Fed Bank of St. Louis President James Bullard said Friday the unexpected weak inflation doesn’t necessarily mean the U.S. central bank should maintain interest rate near zero.

However, most economists seem more confident in sticking with expectation of a June rate hike, according to the latest Blue Chip survey. The reason might be that’s what many Fed officials have suggested in the past.

Some disagree that the Fed could move in June as the outlook for inflation will play a key role. Their viewpoint is that the stronger dollar and weak energy prices will keep inflation below expected levels.

Economists who think the Fed is likely to move in June believe that the healthy labor market will offset worries related to foreign developments or a stronger dollar. The joblessness rate dropped to 5.6% last month, reaching its lowest level since May 2008, versus 6.7% record in December 2013.

“The overall message will be that the FOMC expects to begin the normalization process later in 2015, but without any commitment to a specific time frame for the lift-off,” said Ward McCarthy, chief financial economist at Jefferies.

The Fed is expected to say again that it “can be patient” in beginning to hike rates.

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