Federal Reserve (2)Today is probably the biggest day of the year for the US Federal Reserve. Watch what it says, very carefully.

Bananarama and Fun Boy 3 had the answer. The two 1980s bands collaborated and together they said: “It’s not what you do, it’s the way that you do it, and that’s what gets results.” It will be a little like that today, just subtly different. What matters is not what the Fed does – it will surely increase interest rates by a quarter of a per cent – but it’s what it says that matters.

Actually, it is something of a surprise that Janet Yellen is still chair of the Fed, Donald Trump was scathing of her time as top person at the Fed. Many thought she would resign just about instantly if Mr Trump won the US election. Well he did, but she didn’t – not yet, anyway.

What the Fed does today matters for many reasons.

For as long as US interest rates are low, money flows out of the US into other countries. Emerging markets have especially benefited from low rates, many fear that if US rates rise quite rapidly, then the money flowing out of emerging markets back into the US could precipitate a crisis in these countries comparable to the 1997 Asian crisis.

Then again, we have already had a dry run – so-called taper Tantrum, when the Fed talked about winding down QE – and this did lead to an emerging markets sell-off; but then again, certainly no major crisis.

The real danger occurs if the Fed, after perusing the data, feels it needs to warn that US interest rates might rise much faster than is currently expected.

At the moment, the markets are pricing in two rate hikes next year.

But there are reasons to think the Fed will act with caution.

Sure, US core inflation – which is what the Fed is supposed to focus on – has been over the 2% target rate for more than two years. But it has been showing no signs of surging, in fact, last month the core rate fell, and is only just over 2%

Oil is expected to carry on rising in price next year, that will hit inflation. But then when inflation rises thanks to increasing commodity prices, it is what they call cost push inflation, and central banks only usually react if they see demand pull inflation.

And although US unemployment is now at a nine-year low – that’s a reason to expect demand to push up on prices – but wages are rising very slowly – in fact they fell last month.

Then there is the dollar, this has been rising in recent weeks, mitigating against any external inflation shock.

It’s a big day for the Fed, but the markets will only become nervous if it surprises by focusing attention on the danger of US inflation rising, and the need to increase rates faster than it had previous warned. It may, for example, react to Trump’s plan to launch a massive stimulus package, but right now, the runes point to a steady as it goes Fed.