Will they take it out or leave it in? The FOMC will convene for their 6-weekly meeting on monetary policy and publish its statement at 19.15 CET. In January, the FOMC statement didnât contain too many surprises. The Fed upgraded its eco outlook and unwound its emergency policy measures further, but confirmed its intention to keep rates very low for an extended period of time. The dissent of Kansas Fed Hoenig certainly was a surprise. The statement said: âVoting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.â The Minutes of the January FOMC specified that Hoenig was looking for more policy flexibility by not retaining the extended period of time language and suggesting the phrase that rates would be low for some time. Another regional FOMC voter, St-Louis Fed Bullard later on showed overtly sympathy for the view of Hoenig and while less clearly also governors Lockhart and Evans seem to favour a change in the wording to give the Fed more flexibility going forward. Against these voices, most other governors seemed still comfortable by keeping this language in the statement. So, the debate on the language of the forward-looking rate guidance will be central at the FOMC meeting. We think there is a real chance that it will be changed or at least to appease hawks and doves a compromise is found to change it at the April 27-28 meeting. The January FOMC Minutes showed large divergences on the issue of potential asset sales. Most participants judged a future program of gradual asset sales could be helpful in shrinking the size of the balance sheet and interestingly, several thought it important to begin the program in the near future and shrink the balance more quickly than could be achieved by solely redeeming maturing securities. No decisions were taken though. In the mean time, officials of the influential NY Fed suggested that the Fed shouldnât actively sell the assets it purchased as an emergency support measure during the crisis. Maturing assets wouldnât be replaced, shrinking the pool of assets gradually. We think that the Washington-based Board is of the same opinion, contrary to a number of regional Fed presidents who want to start selling assets quite fast. We think that the NY Fed opinion will prevail. Selling assets might unsettle the mortgage market that is still very weak. The question of selling assets is not a theoretical one. Indeed, if the Fed doesnât sell assets, it will have to conduct its policy via its rates (FF, interest paid on excess reserves). If it does sell assets, the tightening will happen via the longer end of the curve, allowing the Fed to keep official rates very low for longer. The Fed asset purchase programme nears completion (end of March) and given the uncertainty surrounding it, we donât expect the Fed to add to the uncertainty by introducing the perspective of asset sales. Concluding, a change in the wording of the FOMC statement might be a further step in the normalization of policy. It gives the Fed more flexibility and keeps the outlook on rate hikes in H2 alive, on condition that the economy improves further and the recovery becomes broad-based and self-supportive. If the change does occur, we expect the money market and the short end of the bond market to correct, flattening the bond curve. There have already been some moves towards a faster tightening in recent weeks. The implied Dec FF rate stands at 0.53% currently versus 0.44% at the start of the month. https://multimediafiles.kbcgroup.eu...unrise_market_commentary_0900dfde8028b215.pdf