A change to this one clause could be the most important part of the Fed meeting

Immediately
after
the
Federal
Reserve
wraps
up
its
meeting
this
week,
all
eyes
are
likely
to
gravitate
to
one
small
piece
of
wording
that
could
unlock
the
future
of
monetary
policy.

In
its
post-meeting
statement,
the
central
bank
is
expected
give
an
important
hint
about
interest
rate
moves
to
come
by
removing
a
clause
from
previous
statements
that
reads:
“In
determining
the
extent
of
any
additional
policy
firming
that
may
be
appropriate
to
return
inflation
to
2
percent
over
time,”
followed
by
an
outlining
of
conditions
it
assesses.

For
the
past
year-plus,
the
wording
has
underlined
the
Fed’s
willingness
to
keep
raising
interest
rates
until
it
reaches
its
inflation
goal.
Remove
that
clause
and
it
opens
the
door
to
potential
rate
cuts
ahead;
keep
it
and
policymakers
will
be
sending
a
signal
that
they’re
not
sure
what’s
to
come.

The
difference
will
mean
a
lot
to
financial
markets.

Amending
the
wording
could
amount
to
a
“meaningful
overhaul”
of
the
Federal
Open
Market
Committee’s
post-meeting
statement,
and
its
direction,
according
to
Deutsche
Bank
economists.

“We
heard
at
the
December
meeting
that
no
official
expected
to
raise
rates
further
as
a
baseline
outcome.
And
we’ve
heard
that
Fed
officials
are
beginning
the
discussions
around
rate
cuts,”
Matthew
Luzzetti,
Deutsche
Bank’s
chief
U.S.
economist,
said
in
an
interview.
“So
getting
rid
of
that
explicit
tightening
bias
is
kind
of
a
precondition
to
more
actively
thinking
about
when
they
might
cut
rates,
and
to
leaving
the
door
open
for
a
March
rate
cut.”

While
the
market
has
accepted
for
months
that
the
Fed
is
likely
done
raising
rates,
the
most
burning
question
is
when
it
will
start
cutting.
The
Fed
last
hiked
in
July
2023.
Since
then,
inflation
numbers
have
drifted
lower
and
are,
by
one
measure,
less
than
a
percentage
point
away
from
the
central
bank’s
2%
12-month
target.

Just
a
few
weeks
ago,
futures
markets
were
convinced
the
Fed
would
start
in
March,
assigning
a
nearly
90%
probability
to
such
a
move,
according
to
the
CME
Group’s
FedWatch
gauge.
Now,
there’s
considerably
more
uncertainty
as
multiple
statements
from
Fed
officials
point
to
a
more
cautious
approach
about
declaring
victory
over
inflation.

Chairman

Jerome
Powell
will
have
a
thin
line
to
walk
during
his
post-meeting
news
conference.

“They’re
going
to
get
a
lot
of
data
between
the
January
and
March
meetings,
particularly
as
it
relates
to
inflation,”
Luzzetti
said.
“How
those
data
come
in
will
be
critical
to
determining
the
outcomes
of
future
meetings.
He’ll
leave
it
open,
but
will
not
try
to
open
it
any
more
than
what
the
market
already
has.”

For
this
meeting,
it
will
be
harder
to
decipher
where
the
full
FOMC
is
heading
as
it
will
not
include
the
quarterly
“dot
plot”
of
individual
members’
projections.

However,
most
of
the

public
statements
that
officials
have
delivered
in
recent
days
point
away
from
a
hurry
to
cut.
At
the
same
time,
policymakers
have
expressed

concern
about
over-tightening.

The
fed
funds
rate,
currently
targeted
in
a
range
between
5.25%
and
5.5%,
is
restrictive
by
historical
standards
and
looks
even
more
so
as
inflation
drops
and
the
“real”
rate
rises.
The
inflation
rate
judged
by
core

personal
consumption
expenditures
prices,
a
U.S.
Department
of
Commerce
measure
that
the
Fed
favors,
indicates
the
real
funds
rate
to
be
around
2.4%.
Fed
officials
figure
the
long-run
real
rate
to
be
closer
to
0.5%.

“The
main
thing
that
they
will
probably
want
to
do
is
gain
a
lot
of
optionality,”
said
Bill
English,
the
former
head
of
monetary
affairs
at
the
Fed
and
now
a
finance
professor
at
the
Yale
School
of
Management.
“That
would
mean
saying
something
rather
vague
at
this
point
[such
as]
we’re
determining
the
stance
of
policy
that
may
be
appropriate
or
something
like
that.”

Post-meeting
statements

going
back
to
at
least
late
2022
have
used
the
“in
determining
the
extent
of
any
additional
policy
firming”
phrasing
or
similar
verbiage
to
indicate
the
FOMC’s
resolve
in
tightening
monetary
policy
to
bring
down
inflation.

With
six-
and
three-month
measures
showing
inflation
actually
running
at
or
below
the
2%
target,
such
hawkishness
could
seem
unnecessary
now.

“In
effect,
that’s
saying
that
they’re
more
likely
to
be
raising
than
cutting,”
English
said
of
the
clause.
“I
guess
they
don’t
think
that’s
really
true.
So
I
would
think
they’d
want
to
be
ready
to
cut
rates
in
March
if
it
seems
appropriate
when
they
get
there.”

Officials
will
be
weighing
the
balance
of
inflation
that
is
declining
against
economic
growth
that
has
held
stronger
than
anticipated.
Gross
domestic
product

grew
at
an
annualized
pace
of
3.3%
in
the
fourth
quarter,
lower
than
the
previous
period
but
well
ahead
of
where
Fed
officials
figured
it
would
be
at
this
stage.

Traders
in
the
fed
funds
futures
market
are
pricing
in
about
a
60%
chance
of
a
cut
happening
in
March,
the
first
of
five
or
six
moves
by
the
end
of
2024,
assuming
quarter-percentage-point
increments,
according
to
the

CME
Group’s
FedWatch
gauge.
FOMC
members
in
their
latest
projections
in
December
pointed
to
just
three
reductions
this
year.

The
Fed
hasn’t
cut
as
aggressively
as
traders
expected
absent
a
recession
since
the
1980s
and
that
“led
to
excess
investor
confidence
culminating
in
the
1987
stock
market
crash,”
Nicholas
Colas,
co-founder
of
DataTrek
Research,
said
in
his
daily
market
note
Monday
evening.

Yet,
Goldman
Sachs
economists
said
they
figure
the
Fed
will
“remove
the
now
outdated
hiking
bias”
from
the
post-meeting
statement
and
set
the
stage
for
a
cut
in
March
and
five
total
on
the
year.
In
a
client
note,
the
firm
said
it
also
figures
the
committee
could
borrow
a
line
from
the
December
meeting
minutes
indicating
it
would
“be
appropriate
for
policy
to
remain
at
a
restrictive
stance
until
inflation
is
clearly
moving
down
sustainably
toward
the
Committee’s
objective.”

However,
a
restrictive
stance
isn’t
the
same
as
holding
rates
where
they
are
now,
and
that
kind
of
linguistic
move
would
give
the
committee
wiggle
room
to
cut.

Markets
also
will
be
looking
for
information
on
when
the
Fed
begins
to
reverse
its
balance
sheet
runoff,
a
process
that
has
seen
the
central
bank
reduce
its
bond
holdings
by
about
$1.2
trillion
since
mid-2022.

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