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Fed’s pronouncements likely to yield key rate clues

Economists are convinced that the Federal Reserve won’t announce a rate increase at the end of its two-day policy meeting this week, but the central bank will nonetheless have important things to say.

Economists are convinced that the Federal Reserve won’t announce a rate increase at the end of its two-day policy meeting this week, but the central bank will nonetheless have important things to say.

The Fed will issue updated economic forecasts and a policy statement on Wednesday, and its chairman, Janet Yellen, will hold a press conference. So what can we expect from the Fed?

Central bank watchers will be attuned to any changes in the nuances of Yellen’s fresh words, Reuters says.

"We still suspect that Wednesday will be important in terms of communication, given that it is a press conference meeting," Philip Shaw, chief economist at Investec, told Reuters.

Wall Street's top bond dealers now expect the Fed to begin raising rates in September, followed by another increase before the end of the year.

"We don't think the Fed will explicitly reference September, but we do think they will harp on their data dependence and give a nod that a hike this year is likely if the data remain constructive," Tom Porcelli at RBC Capital Markets, told Reuters.

The Wall Street Journal said the central bank wants to reassure people that rate increases, when they come, probably will be gradual and not jarring. The Fed also wants to avoid making promises about where rates are going.

Yellen has been emphasizing that rate increases, when the Fed starts them, will be slow and gradual. The Journal reports that she said “gradual” or “gradually” 14 times during a speech in San Francisco in March.

Because the economy has grown slowly since it emerged from the Great Recession, it probably can’t bear interest rates moving up very far. Higher rates could crimp the borrowing that goes along with business investment or household spending on new homes or big-ticket purchases, such as boats.

“I anticipate that the pace of normalization is likely to be gradual,” Yellen reiterated in late May.

The Fed’s statements Wednesday also will include what MarketWatch called a “dot plot” of the projected path of rates through 2017.

Josh Shapiro, chief economist at MFR Inc., told MarketWatch that he plans to focus on the dots, which represent the best guess of each of the five Fed governors and the 12 district bank presidents about where interest rates should go, based on their individual forecasts.

“The dots, there it is in black and white. That represents information,” he said.

Ellen Zentner, chief U.S. economist at Morgan Stanley, agreed, telling MarketWatch: “The so-called dot plot is extremely useful in providing short-term communication regarding the timing of liftoff.”

Complicating the Fed’s decision, the World Bank and the International Monetary Fund have urged the central bank to delay a rate increase until next year to avoid volatility in financial markets.

"If markets are surprised or think the interest rate hike is earlier or higher than warranted by the strength of the U.S. economy, then there could be financial market volatility," Franziska Ohnsorge, lead author of the World Bank's bi-annual Global Economic Prospects report, told CNBC last week.

After this week’s meeting, the Fed has four more policy meetings scheduled this year — July 28-29, Sept. 16-17, Oct. 27-28 and Dec. 15-16. Let the countdown begin.

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