Fed: The Key Portion Of This Week’s Statement

Yellen Looking For Consensus

Like Ben Bernanke, Janet Yellen appears to be a leader in search of consensus. After artificially holding down interest rates and pumping gobs of money into the financial system, the Fed faces the near-impossible task of trying to keep the financial markets fairly tame during a shift in interest rate policy. FromThe Wall Street Journal:

If the central bank moves too soon to raise interest rates, it could choke off the recovery. But if it waits too long, it risks encouraging too much inflation or otherwise becoming a source of financial instability. Some of the Fed’s strongest critics say it has already waited too long.

The Key Fed Passage

The passage below, from the Fed’s July FOMC statement, is what is referred to as guidance. This Wednesday at 2:00 p.m. EDT the market will be looking for possible changes to the two most important words below: “considerable time”.

The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

The probability of a bullish reaction to this week’s Fed statement will increase if the passage above is not changed in a meaningful manner this week. Conversely, the probability of a bearish reaction will increase if the passage above is altered in a way that hints at “a rate hike is coming relatively soon”.

Pros And Cons Before The Fed

Since it is the market’s reaction to Wednesday’s Fed statement that matters most, it is prudent to review both the bullish and bearish cases before the fun begins. This week’s stock market video looks at cracks, concerns, and support.