Unveiling a New Communication Tool - Projections for Rates

On Wednesday we get the conclusion of the FOMC interest-rate meeting.

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While not much changes is expected to the general language from the previous FOMC statement we will get the historic introduction of a new communication tool by the FOMC in which the forecast for interest rates of each member will be put forward as part of the quarterly FOMC figures. This should give a clearer understanding to the market of where each member sees interest rates headed.

While the FOMC had written this previous statements a commitment to keep interest rates on hold through the middle of 2013, the new projections may push out expectations of any interest-rate increases into 2014.

This meeting will also welcome in the more dovish 2012 non-permanent voting members - Pianalto, Lacker, Lockhart, and Williams.

Therefore we'll see exactly how the new communication tool impacts market sentiment and also if the Federal Reserve will continue to maintain their language about keeping interest rates at extremely low levels throughout the middle of 2013″ now that they have this new foreshadowing tool.

Goldman Sachs has concerns about both FOMC projections and the statement language:

In our view, it would be quite problematic to have the SEP projections and the FOMC rate guidance co-exist, as many market participants seem to be expecting. If they are consistent with one another, nothing is gained by retaining both types of guidance. And if they are inconsistent, this could cause great confusion...

That said, there is a timing issue because the FOMC statement is released at 12.30 but the SEP materials do not come out until 2. This could conceivably trigger an adverse market reaction in the short term. We doubt that this looms very large in the minds of Fed officials, but if it is a concern it is possible that the committee will decide to keep the mid-2013 guidance in the statement one last time, and then have the chairman explain in the press conference why it will disappear in the future.

Newest FOMC Forecasts May Not Offer Too Much New Info

We will also get the newest forecasts for inflation, employment, and growth and the Fed's statisticians will be able to incorporate the latest batch of economic data with labor market and housing surprising to the topside in recent months.

Here's the most recent forecasts from the Fed:

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The Fed lowered its projections for growth and raised their expectations for unemployment in November's figures, and we'll see if those lowered forecasts hold in January. Not too much change is expected however from the November projections.

Headline Inflation Eases, Core Rate Continues to Push Higher

Key for the FOMC will be the reaction of the Committee to shifting inflation dynamics as headline inflation has come off its recent elevated levels while core CPI continues its steady and progressive path upward.

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The FOMC has always placed more focus on headline inflation and we'll see if they expected to keep heading higher as the year progresses.

Any threat of inflation falling back below target at the core level due to expectations of a weaker economy would increase the scope for the FOMC to conduct another round of quantitative easing - with speculation of a $500-$600 billion mortgage-backed security buying program - the most anticipated way forward for the Fed if it takes this course.

Improving Economy Should Limit Any Hints of QE

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For the most part the Federal Reserve has sent signals that it still believes economy is in a precarious position because of the overall weakness in housing and the consistently high unemployment rate - though it has improved of late.

Any move to signal that interest rates won't be coming until 2014 could give the market some extra positive sentiment.

However with the expectation that Bernanke will likely be circumspect this time around in his pronouncements on quantitative easing it may not provided that much of a stimulus to equities and thereby higher yielding risk-sensitive currencies.

Following the release of the FOMC statement Bernanke will hold his quarterly press conference.

The main focus therefore will be on the new rate projections and whether this further guidance by the FOMC is able to goose markets one last time. The second focus will be if the Fed believes the recent pick up in employment and economic activity has any lasting momentum, and if they may be easing their foot of the printing accelerator in 2012 and what would need to happen from the inflation and employment standpoint to cause the Fed to pursue further monetary easing.

Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.