Focus On Forward Guidance In Statement (2/3)

An overview of potential changes in the Fed Statement:

• Almost all of the content in the opening paragraphs is up for a potential revision in January, including removing inflation "remains elevated". The paragraph on financial and credit conditions could be eliminated altered as well. The “financial” conditions language was added to “credit” conditions in November to reflect the significant rise in long-end real and nominal yields in October and that is looking increasingly out of date.

The main focus is the forward guidance, with potential changes eyed from "In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time".

• In order to stave off cut expectations while acknowledging that hikes are at an end, the guidance could compromise by changing to something like the language seen in the December meeting minutes: “The Committee expects it will be appropriate to maintain a restrictive policy stance for some time until inflation is clearly moving down sustainably toward the 2 percent objective. In assessing the future path of the Fed funds range, the Committee will take into account…”
• MNI's Markets Team sees this outcome as being marginally hawkish vs a consensus expectation for the FOMC to indicate it is opening the door more clearly to cuts as soon as March. Potential variations of this include “in assessing future adjustments” (we note “adjustments” is two-sided and has been used by the FOMC in the context of hikes too) and or specifically including the word “patient” or “careful”.
• Hawkish alternatives: No change to the guidance would be the most hawkish outcome. How hawkishly that is interpreted depends on whether one believes that the Fed can still cut in March while maintaining its hawkish Statement bias at this meeting. Some analysts (note UBS in the Analyst section) see the two as compatible, citing the FOMC’s historic willingness to “surprise” with cuts though not hikes. Powell would probably soften this message in the press conference, potentially by noting that cuts can’t be ruled out for future meetings and that the most likely scenario is that rate hikes are at an end, but the knee-jerk response would be a rates sell-off as March cut potential would be seen as diminished.
• Dovish alternatives: The FOMC removes “policy firming” from the statement (perhaps replacing it with “future adjustments”), states definitively that policy is “sufficiently restrictive”, and does not state an expectation that rates will be held at the current level for some time.