There has been a lot of chatter in recent weeks about potential changes in the Fed’s language or approach to rising inflation before today’s FOMC decision. I doubt much is likely to change from recent meetings. The Fed will certainly keep rates at 0.25% and I think they are unlikely to alter the language in any meaningful way. The latest Fed Minutes provide a good preview of the FOMC decision:
“In the discussion of intermeeting developments and their implications for the outlook, the participants generally expressed greater confidence that the economic recovery would be sustained and would gradually strengthen over coming quarters. Their more positive assessment reflected both the tenor of the incoming economic data and information received from business contacts since the previous meeting. Spending by households picked up noticeably in the fourth quarter, business outlays continued to grow at a moderate pace, and conditions in labor and financial markets improved somewhat over the intermeeting period. Although business contacts remained somewhat cautious about the economic outlook, they generally indicated greater optimism regarding their own prospects for sales and hiring than at the time of the previous meeting. While participants viewed the downside risks to their forecasts of economic activity over the projection period as having diminished, their assessment of the most likely outcomes for economic activity and inflation over the projection period was not greatly changed. Most participants raised their forecast of real GDP growth in 2011 somewhat and continued to anticipate stronger growth this year than in 2010, with a further gradual acceleration during 2012 and 2013. The unemployment rate was still projected to decline gradually over the forecast period but to remain elevated. Total inflation was still expected to remain subdued, and core inflation was projected to trend up slowly over the next few years as economic activity picks up but inflation expectations remain well anchored.” (emphasis added)
In other words, rising gasoline prices and signs of recovery have probably not changed their outlook much. The recovery continues, but is disappointing, labor markets remain too weak, and overall inflation remains low. In other words, the Fed will continue to press on the accommodative pedal. The situation in Japan will only exacerbate fears of a slow-down and if anything, make the Fed more likely to be accommodative going forward.