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Will the Fed announcement roil financial markets?

Janet YellenJanet Yellen
Federal Reserve Chair Janet Yellen.Alex Wong—Getty Images

All is quiet in today’s financial markets, perhaps a little too quiet.

Stocks inched higher again Tuesday, while volatility is lower than its been in years. Interest rates, on the other hand, remain low, and market participants expect them to remain low for years to come. To top it off, the unemployment rate has been falling steadily, with the most recent month of job gains putting employment in the U.S. at an all-time high.

In other words, the Fed seems to be achieving its goals as best it can. But that doesn’t mean the central bank can rest on its laurels, or that the markets are any less concerned with what Fed Chair Janet Yellen and company will announce on Wednesday or during the subsequent press conference. Here are three things you should watch for:

1. A revision in growth estimates: Economic data has been generally positive, with employment growth on pace to be stronger in 2014 than in any year since the financial crisis, unemployment claims remaining low, and the Fed’s Beige Book Barometer posting the second highest reading it has in a decade. The fly in the ointment, however, is the lack of GDP growth. After a strong second half of 2013, the Commerce Department has estimated that the economy actually shrank by 1% in the first quarter of 2014, which will likely cause the Fed to revise down its estimates for growth for the year as a whole.

2. A reaction to creeping inflation: Just as the Fed must temper its expectations for growth this year, it also has to be on the look out for higher inflation. The Labor Department announced Tuesday that prices jumped in May more than they have in a year. The Fed will be paying even closer attention to the path of core prices (i.e. prices excluding volatile products like food and energy), which jumped 0.3% in May, surpassing market expectations. As Jim O’Sullivan, chief economist at High Frequency Economics, noted this week, a strong uptick in prices “should be enough to discourage officials from making their forward guidance and more dovish than it already is.”

3. New Faces at the Fed: Though Janet Yellen is the face and leader of the Federal Reserve, she doesn’t make policy decisions by herself. The Federal Open Market Committe, which decides Fed policy, has 12 voting members, and Wednedsay’s meeting will be the first vote for newly confirmed Vice Chair Stanley Fischer, Cleveland Fed President Loretta Mester, and Governor Lael Brainard.

Both Fischer and Brainard are expected to hold similar views to Janet Yellen, but Mester’s views on monetary policy are less established. She served as head of research under the hawkish Philadelphia Fed President Charles Plosser–who has been one of the most vocal critics of quantitative easing within the central bank–and may very well share his views.

As Dallas anti-QE Fed President Richard Fisher told the Wall Street Journal, “She has been a key, influential advisor to Charles Plosser and, as you know, Charles and I are like-minded as regards monetary policy. That said, Loretta will speak her own mind at FOMC. I expect her to be an effective voice at the table.”

New faces at the table could shake up the direction of Fed policy or the tone of its statements, and it will test Yellen’s ability to win support for her policies.