Washington, DC, May 8, 2006--After the confusion last week when the market was blindsided by reports of Fed chief Ben Bernanke's cocktail-party chatter, the Federal Open Market Committee (FOMC) will seek to calm financial markets and deliver a clear policy message, economists said.
The FOMC is expected to raise its federal funds target rate to 5% at its meeting on Wednesday. This would be the 16th straight meeting over almost two years with a quarter-percentage point hike.
Economists said Bernanke signaled that a rate hike was highly likely during his testimony to the Joint Economic Committee of Congress on April 27.
In its March 28 policy statement, the FOMC said it believed that "some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance."
Pointing to this language, Bernanke told the legislators: "In my view, data arriving since the meeting have not materially changed that assessment of the risks."
A rate hike would also soothe markets, economists said, as it is widely expected. A failure to validate market expectations could rattle already jumpy markets, analysts said.
The Fed is widely expected to rip up its previous statement that some more tightening may be needed and try a fresh approach to get the market to understand its central message: The Fed wants to keep its options open in June. It could pause for the first time in 17 meetings or press ahead with further rate hikes.
"It really could go either way in June," said Michael Englund, chief economist at Action Economics.
"Bernanke is probably predisposed to stop at 5%," but he does not want this to be seen as a fait accomplis, Englund said.
FOMC members signaled displeasure with the March policy statement in the minutes of the March meeting released in mid-April.
"Some members expressed concern that retention of the phrase 'some further policy firming may be needed to keep the risks...roughly in balance' could be misconstrued as suggesting that the committee thought that several further tightening steps were likely to be necessary," according to the summary of the meeting.
"I think they are going to change the statement a lot," Moran said, to stress that they are data-dependent and could pause in June.
Englund, chief economist at Action Economics, said the principle goal of the FOMC language will be to prevent financial markets from "knee-jerk" pricing-in of a tightening at the June meeting.
It has been the pattern of financial markets to price-in additional tightening steps as soon as the previous meeting has ended.
To keep markets from jumping to this conclusion, the FOMC "will try to spin the statement so that they clearly have the option at the June meeting to tighten or not," said Englund.
But just as important, the FOMC will include language to stress that the tightening cycle could resume at any time if inflation worries increase.
"They don't want the market anticipating another tightening, but they also don't want the market concluding that the Fed is done," Moran said.
