While market consensus expects 'no new news' to come from tonight's Federal Reserve policy statement scheduled for release at 19:15 London time, investors are on the lookout for minor nuances that could signal the monetary authority's plan for backing off on its quantitative easing policies (QE) just as the FOMC (Federal Open Market Committee) shifts its roster of voting members.

The most anticipated "nonevent" of the week

"We think this Fed meeting is a complete non-event," said the experts at Jefferies, an opinion that aptly sums up the current analyst opinion. While the economy continues to slug along, the improvements seen in recent data are insufficient to force the Fed to move its hand. The US central bank already made clear in its December 12th statement that its primary objective was fostering employment and even went so far as to state that the "exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%."

Keeping in mind that the monthly US Employment Report for December to be published on Friday is expected to show joblessness unchanged at 7.8%, there appears to be little to encourage the Fed to make a move.

Searching for hints of an end to QE3

Interactive Investor noted yesterday that "at their last meeting [Fed policymakers] were clearly considering when to terminate QE3, so the market will be looking for any signs of this and, as with most Fed statements, trying to read between the lines."

This group is referring to the difference of opinion shown in the last meeting minutes wherein some of the voting members felt the asset purchase programme should be continued through 2013, while others thought it might be slowed or even stopped before the end of the year. Even so, the December 12th statement made clear that "the Committee will continue its purchases of Treasury and agency mortgage-backed securities" until the outlook for the labour market improves "substantially".

Changing of the guard

With all this in mind, the most relevant aspect of tonight's meeting will be the traditional "changing of the guard". At the beginning of each year, the Fed rotates its voting members. Market speculation has recently been focusing on Kansas City Fed President Esther George who is a noted "hawk" (traditionally, a "hawk" fears that stimulus policies can fuel rapid inflation and tends to side against easing policies, while a "dove" prefers accommodative policy to support the economy and aid in job creation).

The question is whether George will dissent in the vote on the Fed statement. Richmond Fed President Jeffrey Lacker rotates out of the voting body and was the main voice of opposition to previous statements. In December, Lacker dissented because he "opposed the asset purchase program and the characterisation of the conditions under which an exceptionally low range for the federal funds rate will be appropriate."

In any case, the bias is apparently moving towards the dovish side, according to a piece published by CNN. The US news channel's webpage CNN Money summarised information obtained from Deutsche Bank, JP Morgan and Nomura based on the degree of bias - whether hawkish or dovish - for entering and exiting voting members.

St. Louis Fed president James Bullard joins George on the hawkish side, while Boston's Eric Rosengren and Chicago's Charles Evans are the two doves entering the FOMC this year. "It seems the balance of power is favouring the doves, now that staunch inflation hawks like Charles Plosser, Jeffrey Lacker or Richard Fisher no longer have votes," CNN concluded.

Not now, but when

In short, general consensus doesn't expect tonight's Fed statement to be a game changer, but that won't stop market participants from sifting through the language to analyse any minute change that might reveal the US central bank's "hidden intentions".

With interest rates at record lows, investors will eventually have to weigh an improvement in the US economy against the corresponding tightening of the Fed's current accommodative monetary policy. Since the beginning of the crisis, "Ben Bernanke and company" have sought to spur confidence in financial markets and any exit strategy is likely to put a damper on market bulls.

In the words of DMJ Economic Advisors: "The second the Fed gives a hint that they are in any way being less accommodative, we will see interest rates shoot higher and stock prices fall."

We've been warned.

JM

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