Investing.com – The Federal Reserve (Fed) is widely expected to stand pat on interest rates when it announces its decision at 2:00PM ET (19:00GMT) on Wednesday but investors will go over the latest statement from the Federal Open Market Committee (FOMC) with a magnifying glass, looking for any change in language which could point more clearly to a near-term rate hike.
The Fed indicated last month that at least three rate increases were in the offing for 2017.
However, traders remained unconvinced. Instead, markets are pricing in just two rate hikes during the course of this year.
According to Investing.com’s Fed Rate Monitor Tool, Fed fund futures expect the first increase to arrive in June with a probability of around 66%, while odds currently pass the 50% threshold for the second hike at the December meeting.
Fed on hold until Trump clarifies fiscal policies?
Many experts, and several members of the Fed themselves, have suggested that the central bank will remain on hold until new fiscal policies from President Donald Trump are implemented and impact the economy.
"At the moment there's incredible uncertainty surrounding fiscal policy and the potential for stimulus and the composition of that," economists at Capital Economics said.
“The Fed can't react until it knows what to react to," they explained.
Still, with or without fiscal policies baked in to the economy, the Fed’s preferred inflation gauge, the core PCE price index, showed the measure at 1.7% in December, inching near the 2.0% target.
However, experts from Morgan Stanley remain unconvinced that the Fed will tighten until September “as it looks to allow inflation pressures to build and fiscal policy to take hold before moving again.”
Focus on statement for hints at March move
These analysts believe that there is little need to change the Federal Open Market Committee’s (FOMC) statement as “not much has changed in the incoming data.”
Nevertheless, they admitted that Fed officials had been largely positive in recent comments.
“To the extent an even more upbeat tone emerges in the statement we could see current market-derived probabilities for a March hike rise,” they said.
Markets currently put the odds of tightening at next month’s meeting at about 25%.
With a much more hawkish outlook, economists at ING forecast a hike to come in March as they believe that the “boxes (are) starting to get ticked”.
Their read of wage growth, inflation, business investment and financial conditions all call for a swifter tightening of monetary policy.
With regard to the effect of Trump’s fiscal policies, they admitted that it remains a question.
“But even though the degree and speed of fiscal stimulus may disappoint financial markets, the reality is that we will see more fiscal stimulus under Trump than we would have seen under Clinton, and this should provide a further boost to growth, inflation and rate tightening expectations,” these economists explained.
They too indicated that investors would focus on any subtle hawkish tweaks to the statement including the possibility of a pulling forward of when inflation is expected to meet the 2% target, changes of risks to the economic outlook being tilted to the upside, any hints towards a less “gradual” pace of hikes or clues about when the Fed plans to put an end to the reinvestment plan.
Key events up to the next meeting
In any case, Wednesday’s decision on interest rates comes at an awkward time for the Fed to be able to make many moves.
The recent publication of the advanced fourth quarter gross domestic product (GDP) data saw growth of under 2%, but, on a positive note, some experts highlighted that final domestic sales accelerated to 2.5% from a prior 2.1% while business investment, a major concern for the Fed, rose by 3.1%, following four quarters of declines.
Apart from that mixed data, some observers pointed out that the Fed would be unlikely to move when the new President has only been in office for about a week, while some commentators had suggested that they will more interested to see if Trump references the central bank in any post-announcement tweet.
With a focus on the March meeting, the January employment report will not be released until Friday, while waiting will also give Fed officials time to chew over the February jobs numbers before making a decision that will, unlike Wednesday's meeting, include not only updated economic projections but a press conference by Fed chair Janet Yellen.
If Wednesday’s statement gives hints that the Fed could possibly move as soon as March, attention will intensify on policies announced by Trump, along with Yellen’s testimony to Congress on the economic outlook and monetary policy on February 15.