This week, the Fed is holding a two day meeting, their last of 2014, during which they will announce an updated Federal Reserve policy. The committee will release economic projections for the economy, followed by a press conference with Fed Chair Janet Yellen.
Having studied the moves of the Fed for years, I do not see much change in policy, and I predict that discussions will center on the continued improvement of the US economy (as evidenced by a strong dollar and positive employment numbers). The Fed will likely discuss the effects of lower oil prices and perhaps raise some concerns over a disinflationary environment (their efforts to raise inflation targets with QE and other measures have failed to push prices higher).
I suspect they will consider raising rates, but they will do so slowly. Given the instability around the world, with economies teetering on lower growth and possibly recession, the Fed is likely to take a much more gradual approach. Regardless, the Fed will continue its extraordinary accommodation as the US economy continues to improve.
Fed funds rates could stay under “normal” levels for quite some time; I expect they will emphasize this point. Further, the drop in oil prices will be recognized as an eventual net positive for the US economy and consumers. On the other hand, housing continues to be a drag on the economy and low interest rates have not been of much help. This is a point of concern for the Fed, as housing is an important component of growth. Nevertheless, there are pockets of strength.
Chair Yellen will once again urge some fiscal policy help from Congress and the President to help offset a future reduction in monetary policy. The Fed has done a masterful job adhering to its two mandates of price stability and maximum employment, yet prices could potentially de-stabilize due to exogenous factors like the situation in Russia, lower crude oil prices, lower growth estimates in China, and deflationary concerns in Europe.
Many analysts are expecting changes in language, but any changes were likely already added to previous policy statements (and talked about in the minutes). Those looking for certain words to be removed or added are really more interested in seeing either short-term panic or euphoria in the markets. Good luck, because nothing the Fed says this time will impede policy.