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Fed likely to keep cards close to vest in first 2017 policy statement


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Fed likely to keep cards close to vest in first 2017 policy statement

Federal Reserve policymakers are unlikely to make major changes to their policy stance during the first 2017 meeting of the Federal Open Market Committee as they await more fiscal policy clarity.

Though the year could hold major policy shifts for the bank, with several policymakers predicting several rate hikes during the year, markets are pricing in little chance of an interest rate increase at this meeting. And with uncertainty about the exact economic agenda of President Donald Trump's administration, officials will probably steer clear of any discussion of the potential impacts of the large fiscal spending package promised by Trump.

"There will likely be a lot of echoes of the December statement in this February decision. Not a ton has changed economically, growth and jobs numbers have been in line with expectations and the Fed's forecast, and there are few matters of policy which have been settled and will have a material impact on the economy," said Guy LeBas, the chief fixed-income strategist for Janney Montgomery Scott LLC.

"The Fed has a long history of not pre-acting ahead of fiscal policy. Not only is the execution of fiscal policy uncertain, but its form is completely unknown," he added, saying that the views of Fed officials regarding stimulus may not surface until the minutes of the meeting are released.

Policymakers have opened the year by debating how, exactly, the expected expansion of fiscal spending under the Trump administration will impact the Fed's interest rate policy. On one side have been some presidents of the Federal Reserve regional banks who are rotating onto the FOMC as voting members for 2017, like Federal Reserve Bank of Chicago President Charles Evans, who said his bank added fiscal stimulus expectations into its forecast for the U.S. Of particular worry to these policymakers is the possibility that the Fed may wait too long to continue its rate normalization as fiscal stimulus ramps up. Ultimately, in that scenario, policymakers would likely be forced to more rapidly lift rates amid inflationary pressures — a prospect most Fed officials agree could push the economy back into recession.

Others, however, such as Fed Governor Lael Brainard, have argued that policymakers should be cautious in updating their forecasts or projecting shifts in policy before they happen. Though policymakers will certainly discuss the impacts of fiscal spending at the meeting, for now uncertainty about fiscal policies means policymakers will publicly be circumspect about — and likely avoid entirely in their statement — its potential effects.

"This is a meeting to digest and see what kinds of policies will be implemented, as well as their timing," Tim Anderson, the chief fixed-income officer with RiverFront Investment, said during an interview. Fed futures markets are pricing in just a 4% chance that policymakers will lift their target range for the federal funds rate by 25 basis points, to between 75 and 100 basis points, and currently project that the Fed's first rate hike in 2017 will come at its June meeting.

After meeting market expectations and lifting rates in December, policymakers will also look to use their next meetings as opportunities to hash out a consensus, or at least majority, position on the impact of fiscal policies among FOMC members. Doing that will also allow Fed officials time to signal to markets their own schedule for the next interest rate increase in their normalization once they have a clearer picture of how fiscal policymakers are proceeding.

"It seems like the Fed will be in a wait-and-see mode for the next couple of meetings," Anderson said.