FOMC Outlook: Little Change

The FOMC meets tomorrow. The statement is likely to be little changed from the January statement and is unlikely to spur much of a market reaction.

The statement is very formulaic. The first paragraph offers an economic assessment. While the precise wording may be tweaked, the Fed's assessment that the pace of recovery is insufficient to "bring about significant improvement in labor market conditions" remains valid.

The recent pullback in commodity prices is unlikely to get much notice by the FOMC as prices for commodities like oil or the CRB index more generally, remain above levels that prevailed when the Fed met last in late January.

The second paragraph is the Fed's assessment of inflation and inflation expectations. To the extent that inflation expectations have risen, as measured by break-evens on the TIPS, it appears to reflect more near-term expectations in the face of higher oil prices rather than impacting longer term expectations. The often cited 5-year/5-year forward is essentially unchanged since the Fed's last meeting, suggesting inflation expectations remain anchored. This paragraph does not need to be substantively changed either.

The third paragraph also does not need adjustment. It simply affirms the Fed's commitment to its asset purchase plan. It was essentially the same in Jan as it was in December. The fourth paragraph that provides a target for the Fed Funds rate also needs no alteration.

Lastly, there were no dissents in January. Since the Fed is not going to making a new decision, there might not be a good reason for some of the more hawkish regional presidents to dissent. However, the guidance that conditions are "likely to warrant exceptionally low levels for the Fed Funds rates for an extended period" may provide the fodder of future objections.

On balance, tomorrow's FOMC meeting is likely to be a non-event for the markets. The next meeting will be April 27. It may be then that the Fed turns its attention to begin discussing whether to extend QEII and if not, how to signal its termination in the least disruptive way possible for the capital markets.