Today is the start of the regular meeting of the Federal Reserve, which is tasked with managing the U.S. economy. The way it usually does this is by setting base interest rates, which the rest of the financial system keys off of. In recent years, the Fed has also used other methods—notably, buying bonds to reduce interest rates even further than the usual tools would allow.

Now, however, interest rates are the main focus of policy—specifically, whether to start raising them. With the economy growing fitfully, and the news rotating from bad to good and back again, the Fed has hinted on several occasions that this time, really, rates would rise, only to step back after some bad news and say, No, just kidding.

To hike or not to hike?

This meeting stands to be the latest iteration of the cycle. As recently as a couple of weeks ago, economic growth looked strong, and Fed members were hinting that rates could rise in September. Then, bad news broke, led by the poor ISM figures, and officials started to pull back. As the meeting kicks off, expectations for a rate increase are very low.

If they’re not going to raise rates, then what will the Fed members be up to? I suspect the discussion will focus less on economic data—employment continues to be strong, and inflation seems to be rising to and even above the Fed’s target—than on risks to the financial system. With the economy where it should be, from the Fed’s perspective, the conversation has to shift from the risks of raising rates to the risks of keeping them low.

There are signs this is happening. The head of the Boston Fed, who has a reputation as an interest rate dove, rattled markets by noting in a speech that the risks of not acting were increasing. Other officials have made the same point. The pressure to do something is clearly rising internally, which seems to be the only pressure that matters.

Waiting for growth to pick up

With employment healthy and inflation getting there, the only reason not to act is fear of financial market turmoil. The problem the Fed has is that markets are currently trading based on monetary policy rather than fundamentals. We can see that in how the market jerked around over the past couple of weeks based on comments from central bank officials. Low rates, driven by policy, have inflated valuations in almost all markets, and any policy change risks pulling those markets down.

What the Fed needs is faster growth, which would allow fundamentals to approach current policy-driven valuations before it makes a move. Earlier this quarter, for example, when it looked like growth was accelerating, talk of higher rates did not rattle the markets; the two offset each other. It was only when it looked like we’d get both slower growth and higher rates that markets dropped. The Fed needs that faster growth to make the transition as smooth as possible.

What matters is how much of a market reaction the Fed is prepared to accept, which will determine how much growth it requires to announce a hike. Based on earlier comments, it looks like 3 percent–3.5 percent will be enough, and that number could drop even lower going forward.

What I’ll be watching for

Personally, I’ll be looking for any discussion of the risks of not acting and any hints as to how the Fed is reacting to rising inflation. I’ll also be looking at how the Fed expects growth to evolve in the near term. December may still be an option, but increasingly, it will be these two factors, rather than the Fed’s actual mandates of employment and inflation, that will drive policy.

In some respects this is good. The fact that the Fed’s mandate has largely been met can be taken as a sign that monetary policy has actually achieved its goals. On the other hand, the Fed really can’t declare victory until it has normalized policy.

This will be a harder task, and a more delicate one. It will also be more difficult for outsiders to judge; unlike the mandate goals, there are no hard and fast targets for success. We will have to revert to reading the tea leaves, looking between the lines, and trying to second-guess what the Fed really means. In other words, we will have returned to where we were with the Greenspan Fed, famous for “I know you think you understand what you thought I said, but I am not sure you realize what you heard is not what I meant.”

Look forward to substantially more policy uncertainty going forward.

Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan.

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