The 6 Things to Watch in This Week's Fed Meeting

(Bloomberg View) -- The Federal Open Market Committee meeting this week is likely to reinforce the baseline expectation of three hikes this year thanks to a more upbeat outlook for the U.S. and global economies, and somewhat diminished concern about "lowflation."

Specifically:

1. Rather than be deterred by the headline miss on the first estimate of fourth-quarter gross domestic product growth reported Jan. 26, Fed officials are likely to welcome the data's relatively strong internals, particularly those regarding investment and consumption. Indeed, the latest numbers will be seen as adding to a more general string of solid economic reports, both for the U.S. and for the rest of the world.
2. This synchronized pickup in global growth, along with increased comfort with the inflation dynamics, will solidify the previous baseline guidance of three 25-basis-points hikes in 2018, with the first likely to take place in March. The recent depreciation of the dollar also contributes to this outlook. Indeed, compared with last year, market and Fed expectations for the annual path of rate hikes are on track for a much earlier convergence.
3. Although some observers and market participants may also be tempted to alter the balance of risks to the upside -- that is, to expect four rather that two hikes in the event the current baseline fails to materialize -- the Fed will see the two-sided risks as balanced for now.
4. There is unlikely to be anything new or notable about the balance-sheet reduction plan. The previously announced timeline won't be revised or even highlighted in any major way. Meanwhile, more general exploratory discussions about frameworks and targets are likely to proceed gradually, with the aim of ensuring continued effective baseline management and exploring contingencies, resilience and reactions in the event of unanticipated adverse shocks.
5. With a successful steady-as-it goes monetary policy in the U.S., more attention will need to be devoted to the economic and market impact, including on U.S. interest rates and other market valuations, of the actions likely to be taken this year by the Bank of Japan and the European Central Bank in response to better-than-anticipated developments in their economies. But Fed deliberations on these matters are unlikely to be publicized in any notable fashion.
6. Finally, this will be Chair Janet Yellen's last FOMC meeting, and she is likely to receive lots of accolades from her colleagues. Working collaboratively and effectively with other Fed governors and regional presidents, she has engineered an ongoing "beautiful normalization" -- that is, a gradual, cautious and sequential exit from years of unconventional monetary policies that has neither disrupted markets nor derailed growth. The new Fed chair, Jerome Powell, is well placed to build on and successfully extend this achievement.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He was chairman of the president's Global Development Council, CEO and president of Harvard Management Company, managing director at Salomon Smith Barney and deputy director of the IMF. His books include "The Only Game in Town" and "When Markets Collide."

To contact the author of this story: Mohamed A. El-Erian at melerian@bloomberg.net.

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.

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