Goldman Sachs on Today's Federal Reserve Open Market Committee Meeting

From ZeroHedge:

Goldman's Sven Jari Stehn answers the 11 most critical questions regarding to day's "most-important-FOMC-meeting-ever."

Q: Will "considerable time" be dropped?
A: Yes, we believe the "considerable time" language will be dropped.

December has for some time looked like the most natural meeting for modifying the guidance given the leadership’s expectations for liftoff in mid-2015, the typical translation of “considerable time” into about six months, and the absence of a press conference in January. Speeches by Fed Vice Chairman Fischer and New York Fed President Dudley two weeks ago confirmed that we are getting closer to the date when "considerable time" will be removed. Since then we have seen a strong employment report and a bounce-back in University of Michigan long-tem inflation expectations, which reinforce the expectation that the guidance will be modified.

We do not, however, think that a change in guidance is a done deal. First, while a number of Fed officials have explicitly or implicitly voiced support for switching the forward guidance towards “patience,” others including San Francisco Fed President Williams are comfortable with “considerable time.” Second, the October minutes suggest that some participants were worried that the removal of considerable time might be seen as a shift in the stance of monetary policy and therefore tighten financial conditions. The continued decline in oil prices and market-implied inflation expectations, as well as the recent turmoil abroad, might well reinforce these existing concerns.

Q: How will "considerable time" be modified?
A: Recent Fed communication has focused on two themes: the word “patient” has shown up frequently and Fed officials have continued to stress that policy is data dependent.

One possibility to combine these themes would be to follow Boston Fed President Rosengren’s formulation and state that the "committee expects to be patient in beginning the normalization of the target range for the federal funds rate until it is clear that the economy is on the path to achieving both the 2 percent inflation target and maximum sustainable employment.”

The leading alternatives, in our view, would be either to keep "considerable time" or adopt "patient" without the data dependence. The former would increase the likelihood of the first hike occurring in September of next year. The latter would raise the parallel with 2004--when "considerable period" gave way to "patient" in January and the FOMC hiked in June--and thereby increase the chance of a rate hike in June or even earlier....MORE