It really shouldn’t be difficult to estimate what the Fed will say or do following their 2-day meeting. The results have been clear in the data since the last meeting, when the Fed told you to follow the data as they have done.
Production data via the ISM and PMI have shown good solid growth in this segment of the economy. Industrial production has been moderate, but we saw a nice jump in productivity last quarter, which bodes well for improvements in hiring down the road. Housing is still a drag on the economy, and recent numbers in retail sales show there was a slump over the summer but that may have started to turn. Wage growth has been stagnant for years and will continue to be until the slack in the labor pool slack is gone. Exports have also given the economy a boost, while the trade-weighted dollar is much improved (giving US citizens more buying power).
Rates are at stubbornly low levels, which reflect the lack of confidence in an improving economy. Once that is cleared up, we may see the yield curve steepen a bit, but that may be a function of the Fed’s economic forecast for 2015 (in which an optimistic scenario could steepen the long end of the curve). Inflation is just about at its threshold but seems to be contained. The Fed would like to see this level of inflation stay here for a bit longer.
Chair Yellen will likely speak to the lack of action in Congress/White House about fiscal policy. The Fed will also talk about improvements made during the Q2 bounce back and continued momentum through the rest of year, with the economy growing at a moderate pace. They will continue the taper and finish this program up at the next meeting (around Halloween). No new program is being considered, but they will certainly stand at the ready in case something rocks the markets.
Simply put, I do not expect any changes. There is just not enough evidence out there to support a rate hike, no matter what talking heads might be saying. Instead, you can expect the Fed to issue another plain vanilla statement with a revised economic assessment. Perhaps they’ll touch on rates out to 2017 for the first time, but otherwise, do not expect any drama from the Fed this week.
