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What Might the Fed Say This Afternoon?

It would be surprising if today’s statement did not include a comment more pronounced than a mere mention of “international developments”—the phrase that appeared in December’s press release. Note that in last September’s release, the phrasing reflected a much greater degree of caution: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

In the December press conference, Chair Yellen only addressed volatility to the extent that the Fed “wouldn’t be focused on short-term financial volatility,” but rather on “unanticipated changes in financial conditions that were persistent” that the Committee “judged to affect the outlook.” While today’s release isn’t accompanied by a press conference, I would argue that the sustained decline in oil prices, global equity market volatility, the slowdown in China and the currency weakness observed across emerging markets merits some acknowledgement in the statement similar to the phrasing that appeared last fall.

The YoY increase in the core PCE index has been stuck at 1.3% for the first 11 months of 2015, so at a certain point, the Fed risks losing credibility if it only repeats that the Committee will “carefully monitor actual and expected progress toward its inflation goal,” with “the transitory effects of declines in energy and import prices dissipate[ing].” The Fed’s main challenge is acknowledging the strength of continually improving labor markets in light of inflation risks that have been tilted toward the downside.

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Heidi Learner

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