How to Break Down Tomorrow's Fed Statement

The FOMC holds a two-day meeting this week that concludes on Wednesday. Although the market flirted with the possibility of a rate hike, cooler heads have prevailed, and encouraged by a string of disappointing data, the market realizes it is too early to seriously contemplate a Fed rate hike.

What the Fed says will likely be more important than what it does. The statement following the meeting is likely to be about five paragraphs in length and echo some of the recent comments from Fed Chairman Bernanke and other senior Fed officials.

The first paragraph is will simply be a summary of the decision to keep rates steady at 2.0%.

The second paragraph is the Fed's assessment of the economy. This will likely be similar to the April statement when the Fed said, "...economic activity remains weak." However, given the upward revisions to back-month retail sales data and the fact that, contrary to some surveys, American households appear to be spending a greater part of the tax rebates, the FOMC may tone down a bit its assessment that household spending has been subdued. It has been subdued, but less than thought. At the same time, though, it is true that labor markets have softened and the tax rebates are a one-off factor.

In April, the Fed also offered an assessment of the financial markets in the second paragraph of its statement. "Financial markets remain under considerable stress and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters," still seems to be a valid assessment. Following Bernanke's recent comments, the Fed may acknowledge that the risks of a significant contraction of the U.S. economy appears to have eased in recent weeks. The IMF seems to concur.

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Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.