"Fed In A Box" - Vince Reinhart's FOMC Probability Matrix

Since the only topic on everyone's mind until 1:59:59:9999 pm today (excluding those who have been leaked the FOMC decision in advance of course) will be what the Fed will do, here are some additional perspectives from former FOMC secretary and economist Vince Reinhart (currently at Morgan Stanley), who believes nothing happens today as the Fed has "boxed" itself in, and his Fed Statement Probability Matrix.

But first, here is why to Reinhart, the Fed is (has been, continues to be) in a box:

Here is the box Fed officials have made for themselves. They have to continue the language that they are willing to increase or decrease monthly asset purchases, as it is evidence of their data-dependent flexibility. But if the only new data point is that inflation fell and risks becoming unanchored, it would seem odd to decrease purchases right away. Not acknowledging the inflation fall, thereby ignoring a yawning shortfall from their dual mandate, risks ridicule.


The solution is likely to be an unsatisfying combination of admitting the inflation result, asserting that inflation expectations remain anchored, and repeating that QE is a flexible tool. Indeed, expect Chairman Bernanke to be painfully evenhanded toward QE. This may make it seem like they are ready to start tapering imminently. Not so. Look for even more talk first. They need to roll out their revised exit strategy, probably working through the argument at the semiannual monetary policy hearings, and see that inflation settles down. This puts QE in play for the September meeting at the earliest, and if our forecast eventuates, subdued inflation could stay the Fed’s hand even longer.

And the probability matrix: "The table below provides some possible wording language, starting from the words of the May statement that may be in play. Strikeouts indicate deletions and bold face indicates insertions."