FOMC preview: Fed to keep September hike in play

The Fed is unlikely to make any policy changes at this week's FOMC meeting, which concludes tomorrow. However, we would see a FOMC statement asserting that economic activity has continued to expand and that "underutilization of labor resources" has continued to diminish as a clear signal that a September rate hike is likely.

The key uncertainty related to this week's FOMC statement is how clearly the Fed will communicate the likely timing of the first rate hike, which the central bank still expects at some point before year-end, according to Fed Chair Yellen's Congressional Testimony two weeks ago.

Before the start of the last tightening cycle in 2004, Fed officials warned financial markets one meeting before they acted. In that episode, they dropped an assurance from their May 2004 FOMC statement that the Fed would be "patient" before raising rates and instead said that they would move at a "measured pace", then raised rates at the next meeting in June.

In April this year Fed officials debated whether to offer an "explicit indication" ahead of the expected first rate increase, as they did in 2004, but minutes of the meeting showed they chose a different approach.

Against this background, we would see a FOMC statement asserting that economic activity has continued to expand and that "underutilization of labor resources" has continued to diminish as a clear signal that a September rate hike is likely.

"We continue to expect the first 25 bp rate hike in September and see another in December. After Yellen's testimony earlier this month, it is our impression that it would take a notable downshift in Fed officials' outlook for growth, jobs or inflation for the Fed to wait until 2016 before raising rates," notes Nordea Research.

Rising inflation pressures will imply that the pace of tightening after the initial rate hike will be more rapid than currently signalled by the Fed and faster than is priced in by markets.

The FOMC statement will be released at 20.00 CET tomorrow. There is no press conference after the meeting, and no projections will be released. Meeting minutes, which will be published in three weeks, could provide more clues about how close officials believe they are getting to raising rates.