FOMC Preview

Last week, ahead of the September Federal Reserve meeting, the two-year Treasury note, which is sensitive to Fed policy, hit a high of 0.57%, a level not seen since May 2011. Along with an incremental cut in asset purchases, the market is pricing in the possibility that the Fed will shift its current policy language, potentially providing details on the timing and speed of interest rate normalization. There has been ample debate among Fed officials about just how much guidance to give the public. In recent weeks, Boston Fed President Eric Rosengren and Cleveland Fed President Loretta Mester have both said that the Fed should move away from providing detailed assurances and instead focus on the incoming economic data. Philadelphia Fed President Charles Plosser, who has a more hawkish view than the committee consensus, dissented at the Fed’s July meeting because he believes rates should be raised sooner rather than later. The internal discussion is taking place in the midst of a US economic picture that is picking up steam in the second half of the year.  Despite a disappointing August employment report, growth is trending near 2.5% and early signs of wage inflation are beginning to emerge, strengthening the argument for policy normalization in the middle of 2015. In addition to a potential shift in guidance, the September FOMC meeting marks the first time we will see the dot plot (the Fed’s summary of economic projections and Fed Funds rate forecasts) extend to 2017. It is safe to say that all eyes will be on Chair Yellen this Wednesday as the markets anxiously await any indication of monetary policy tightening.