–Small Updates to Assessment of Economic Activity in Statement
–No Change to Reinvestment, Balance of Risks Language
WASHINGTON (MNI) – Federal Reserve watchers still expect the central bank to deliver the three interest rate increases they envisioned for the year but are not anticipating any clear hint about a June hike in the post-meeting statement Wednesday.
Language on balance-sheet policy is also expected to stay unchanged, while an update of the economic outlook may nod to weaker growth in the first quarter, analysts said. The Federal Open Market Committee is expected to keep the target range for the fed funds rate at 0.75% to 1.00%.
“Frankly, there is no need to” hint at a June move, JP Morgan economists said in a research note. “When the data have been unfolding in line with your outlook — an outlook that you expect to be met with three rate hikes this year
— you should continue to allow the data to do the heavy lifting.”
And with market probabilities for a June hike at roughly 60% going into the May meeting, “the Fed need only deliver a benign statement updating its assessment of current conditions and its assessment that risks to the ‘near-term’ outlook remain ‘roughly balanced’,” they said.
Bank of America Merrill Lynch analysts, who deem the data may actually be too be too weak to support another move in the first half of the year, are likewise not expecting much new guidance in the May statement.
At this point they see as a likely scenario that in June “the data are not quite strong enough to pull the trigger and the Fed hints at a later date for shrinking the balance sheet.”
The FOMC statement’s characterization of job gains as “solid” and inflation as “little changed” could remain appropriate, analysts said.
The unemployment rate, having sank to a decade-low 4.5% last month, is already at the rate the FOMC expected at the end of the year, despite the dip in new payrolls in March.
That appears to be pushing wages higher. The employment cost index, which grew 0.8% in the first quarter, showed the highest level of wage growth since 2007 and “provides some affirmation to the Fed’s view that the Philips curve remains relevant,” BNY Mellon Strategist Marvin Loh said in a client note Friday.
“Given that the Fed is focused on labor inflation, we think that today’s reports support its base expectation of hiking rates an additional 2-times this year. We continue to think that a June and September hike the most likely scenario, which paves the way for balance sheet reductions by year end,” Loh said.
The surprise drop in core consumer price index in March may be “a bigger potential worry for the FOMC” as falling auto prices and competition among cell phone service providers are likely to weigh on inflation in the months ahead, Capital Economics’ Michael Pearce said.
“Even so, we do not think this will be enough to deter the Fed from raising rates again in June,” he said.
The Fed could acknowledge recent weakness in household spending or the softer tone of business surveys, though officials likely view the consumer data as a temporary setback before a strong rebound in the second quarter, analysts said.
With business investment coming in robust in the first quarter, the committee could upgrade its assessment from March’s “firmed somewhat,” JP Morgan said. Nonresidential fixed investment surged 9.4%, a Commerce Department report Friday showed, led by a 22% increase in structures and a 9% increase in fixed equipment.
Overall GDP growth for the first half could still average out to around 2% despite the lower than expected 0.7% pace in the first quarter. Combined with loose financial conditions and little near-term risk to cloud the outlook, most analysts said Fed remains still on course for a June hike.
Most analysts also agree the Fed could announce a change in its reinvestment policy in December, likely setting a monthly limit by which the balance sheet can shrink.
The announcement “would be equivalent to one 25bp hike,” BAML analysts said, based on an estimate using the Fed’s FRB/US model, but “much of the market impact will be priced in when the Fed announces its revised reinvestment policy.”
–MNI Washington Bureau; +1 202-371-2121; email: [email protected]
Source: MNI