What the Fed will & won’t do this week

The Federal Reserve’s policy meeting this week will be closely watched, particularly after the stimulative measures taken by the European Central Bank last week.
Here are some steps that U.S.
central bankers will and won’t take, and particularly those of greatest
interest to financial
markets:
n Fed officials will note the continued recovery of the U.S. economy, led by strong job creation, but without sounding the all-clear on wages and inflation (both remain too low).
n They will reiterate concerns about global economic weakness but refrain from upgrading the risks of spillover onto the real economy at home.
n They will seem somewhat
comforted by the return of relative financial stability, especially after
the volatility a few weeks ago that again illustrated the fragility of
investor sentiment both in the U.S. and elsewhere.
n They will leave the Fed’s interest rate structure as is, and they will make no changes to the policy governing the use of its balance sheets.
n They will guide the markets
toward the possibility of more
interest rate increases than are currently priced in by traders and investors, but they will do so in a gentle manner.
n They will again highlight the rather unusual uncertainty facing both the economy and policy making, including by stressing the need for careful monitoring of data and agile policy responses.
Putting this all together, the Fed once again will emphasize both its dependence on data and its policy conditionality. This, however, will be accompanied by careful signals that — unlike other systemically important central banks in China, Europe and Japan — the Fed remains inclined to cautiously pursue its path of gradually higher interest rates and monetary policy normalization.

Mohamed A El Erian copy

Mohamed El Erian, a Bloomberg View columnist and chief economic adviser at Allianz, is chairman of Barack Obama’s Global Development Council,
ex-CEO of Pimco and author of “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse”

Leave a Reply

Send this to a friend