Here's The One Thing You Should Look For In This Week's FOMC Statement

The Federal Reserve holds its next Federal Open Market Committee (FOMC) meeting this week on October 29 and 30.

Economists largely expect it to be a non-event. Everyone expects the Fed to keep its benchmark interest rate at at near zero (0 to 0.25%) and we can't seem to find a reputable economist predicting a tapering of the Fed's $85 billion large-scale asset purchase program, which is informally referred to as quantitative easing (QE).

"[T]he government shutdown obscures readings on the economy in the current observation window," said Vincent Reinhart, Morgan Stanley's Chief U.S. Economist. "There is the direct drag on GDP from dropping out the hours not worked by furloughed employees, the indirect loss of businesses tied to the government, and the hesitation induced in the momentum of private spending from increased uncertainty and reduced confidence. Fed officials will not know how to disentangle these threads at the upcoming meeting."

But that doesn't mean we should ignore the meeting and announcement altogether. Matthew Hornbach, Morgan Stanley's top interest rate strategist, thinks we should keep an eye on a language tweak in one key paragraph:

How Risky Is the October FOMC Meeting?
Just because the Fed is unlikely to taper at the October FOMC meeting does not mean the October FOMC meeting will pass quietly into the night. The market should focus on how the Fed changes the official statement because it could send important signals about future policy actions (or lack thereof). The market should focus on this part of the upcoming FOMC statement the most:

The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.

At some point, "since last fall" is going to sound confusing because we are making our way through "this fall". Of course, the Fed means to say "since we began QE∞", so they could always clarify the statement in that way. But, the more appropriate question to answer might be, how have downside risks changed "since the summer"? While financial conditions in the eyes of the Fed should have loosened since the September FOMC meeting, given the decline in mortgage rates, the government shutdown introduced new uncertainties. Any hint that downside risks to the outlook have increased "since the summer" will put another bid into the Treasury market, in our view.

Beyond changes in language, Reinhart doesn't expect any significant changes to monetary policy until next year.

The Fed will publish its FOMC statement at 2:00 p.m. ET on Wednesday.