The stakes were already high going into this week’s US Federal Reserve policy meeting. But the vertiginous surge in the dollar, alongside disappointing economic data, has heightened uncertainty about Wednesday’s announcement.

A few things seem clear: rates are not yet moving from their near-zero levels, but Fed chairwoman Janet Yellen wants to free the Federal Open Market Committee to raise them when it sees fit. As a result, low-rates guidance is likely to be junked. And the strength of America’s labour market — where payrolls have been rising by more than 200,000 a month for a year — means June or September still seem the most likely moments for a first increase.

But beyond these presumptions lie a host of questions: will the Fed be forced by low inflation to delay its first rise, how rapidly will it lift rates following the initial move, and where will the official rate end up in a couple of years’ time? The markets are betting the Fed will shy away from anything other than very modest rate increases. Some FOMC members think investors are being complacent.

Patient no more?

It would be a surprise if the Fed’s existing pledge to be “patient” before raising rates — meaning that it will wait at least two meetings — survives the FOMC meeting. Ms Yellen made it clear to Congress last month that she wanted to ditch detailed guidance and move to assessing the merits of any increase on a “meeting-by-meeting basis”. If the patience signal is indeed dropped, she is likely to reiterate another message from that testimony, namely that markets should not leap to the assumption that the first increase will follow in June. The likely new test for the Fed has already been foreshadowed by Ms Yellen: as long as the jobs market continues to improve, the FOMC will raise rates when it is “reasonably confident” that inflation will move back towards 2 per cent over the medium term. As some economists have pointed out, this is not a particularly high bar.

How has the growth and inflation assessment changed?

This is where Fed signalling becomes a little murkier. As economist Michael Feroli of JPMorgan Chase says, it is likely that the Fed’s growth and inflation projections will be revised downward this week, even as the outlook for the unemployment rate is trimmed. The softer growth and inflation outlook partly reflects the jump in the dollar, which will weigh on net exports, as well as a weaker starting point for gross domestic product in 2015. The mixed forecasts will highlight the messaging problem the Fed faces. While jobs gains have steamrollered through market expectations, other indicators — retail sales, for example — have been weaker and inflation is well below the Fed’s 2 per cent target. Wage growth also remains insipid.

So how will the dollar feature?

The FOMC is unlikely to mention the dollar explicitly, although there was an allusion to “international developments” in its January statement. But Ms Yellen will be peppered with questions about the greenback’s rise in her press conference on Wednesday afternoon. The euro has tumbled 15 per cent against the dollar since the last Fed forecasts in December. US equities have largely erased their gains for the year, with the strength of the dollar hurting earnings estimates. While colleagues including Stanley Fischer, Fed vice-chairman, have said the dollar’s surge is a reflection of US economic strength, it is also the result of devaluation strategies by other central banks and will drag further on growth and inflation. It will make price data harder to predict and interpret, which could argue for a delay on rates. “It’s very difficult for the Fed to be the first to exit easy money policy against the backdrop of a currency war,” says William O’Donnell, strategist at RBS Securities.

Are the Fed’s dots likely to move?

As part of quarterly forecasts, the Fed will produce a so-called “dot plot” setting out the predictions of FOMC members for the key interest rate. In December six out of 17 participants were predicting a Fed Funds Rate of 1.5 per cent or more by the end of 2015. Given a move is not likely until June at the earliest, some of those predictions may be pushed back to 2016. The dollar surge and energy price collapse could also prompt some FOMC members to trim rate predictions as they anticipate a slower rise in inflation, argues Torsten Sløk of Deutsche Bank.

What about investor reaction?

David Ader, strategist at CRT Capital, says the bond market has already moved beyond the likely removal of the term ‘patient’ from the FOMC statement and is looking further ahead. “The question is really what comes next and how fast does the Fed tighten policy over the next year?” he says. As things stand, the Fed and markets are out of sync, with policy makers predicting higher official rates than the futures market, which sees them at just 2 per cent in 2017. A further question looming is how easy the Fed will find it to steer market borrowing costs. The Fed has been testing new tools to do this, but is in uncharted waters as it withdraws from its ultra-easy monetary policy.

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