Weekend Economists Celebrates Psychedelia - March 14 - 15

[Demeter]

49. Does the Fed save the ‘patient,’ or let it go this week? By Wallace Witkowski

http://www.marketwatch.com/story/does-the-fed-save-the-patient-or-let-it-go-this-week-2015-03-15?siteid=YAHOOB

Like a hospital soap opera, much of this week will boil down to what happens to the “patient.”

On Wednesday, the Federal Reserve will release the statement from its two-day Federal Open Market Committee meeting, and investors are keeping a sharp lookout for whether the word “patient” still appears in the statement, a key reference to when the Fed will begin hiking interest rates.

That one detail is crucial for how already-beaten-up stocks fare this week. Last week, the Dow Jones Industrial Average DJIA, -0.82% shed 0.6% and the S&P 500 Index SPX, -0.61% declined 0.9%, putting both indexes into negative territory for the year to date. The Nasdaq Composite Index COMP, -0.44% shed 1.1% for the week but is still up 2.9% for 2015.

“The biggest short term question with regard to the March FOMC is whether the committee chooses to include the ‘patient’ term in their policy statement or drop it,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, in a recent note.

“In terms of impact, retaining the word would imply a first rate hike would be most probable after June and by September 2015,” he said.

For quite a while, the consensus estimate had been that the Fed would start hiking rates in June, but analysts and economists are increasingly nudging the move out to September. LeBas believes the Fed will leave “patient” in its statement, signalling a rate hike closer to September than June.

Another thing to look for in the statement is the Fed’s newest “dot plot,” which should reflect the trajectory of tightening once the first rate hike goes though, LeBas said. The dot plot from the last FOMC meeting appears below:

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“As for why we believe September rather than June, it really boils down to one simple fact; the Fed’s preferred measure of inflation, the headline change in personal consumption expenditures, has not been north of 2.0% since spring 2012,” Greenhaus said.

“Our view is that after such a long period of missing their target, Fed members will ultimately want/need just a few additional months of data before being╉reasonably confident╊ inflation will return to trend,” he said.