It’s the biggest Federal Reserve meeting of the year — so far.
At the end of a two-day meeting on Wednesday (starting tonight AEDT), we’ll get the full Fed-day package: an FOMC interest-rate decision, a new “dot plot” with expectations for future rates, an updated summary of economic projections, and a press conference by Chair Janet Yellen.
There are only four days like Wednesday scheduled for this year.
Expectations are the Fed will keep interest rates pegged at 0.25%-0.50% with the Fed potentially laying the groundwork for rate hikes at perhaps as many as three additional meetings this year.
When the Fed signalled last December that it expects to raise rates four times in 2016, markets anticipated that the March meeting — followed by the all-important Yellen presser to explain the decision — would be one of them.
But over the past few months, expectations for higher rates have tumbled as shown by the Fed Funds futures market.
The Fed sounded dovish in its last statement in January when it left the benchmark rate unchanged, saying economic growth had “slowed” from being “moderate,” and said it expected inflation would remain low in the near term.
The Fed also put global financial markets on notice, saying it will monitor any pass through from volatility in financial markets to the labour-market and inflation outlooks.
And so a key thing to look for on Wednesday is how the Fed re-calibrates its expectations based on what’s happened since the last meeting.
BNP Paribas economist Paul Mortimer-Lee argued in a recent note that it’s unlikely we’ll get another unanimous decision from the committee on the benchmark rate.
There were no dissenters to the last two FOMC rate decisions.
Mortimer-Lee explained what the Fed will be grappling with, writing:
Almost certainly, we feel, there will be a reluctance to believe that the December rate hike had much to do with the markets’ behaviour. The main support for the “everything is fine” camp is the behaviour of payrolls and the bounce we saw in January retail sales. Economic surprise indices have improved in recent weeks, though the level of positive surprises is still a lot less than in 2014. Others may take the view that global conditions are to blame, and will note the soft tone in investment, which should make that group more cautious.
Mortimer-Lee thinks the Fed will ultimately remain on hold because there’s still lots of uncertainty about the consequences of the recent market chaos not because of any shift in the Fed’s views on growth and inflation.
This uncertainty is likely to feed through in their communication about risks to the economy, he argued, especially if they leave rates unchanged as markets expect.
But the Fed’s outlook is altogether becoming less about economic data — or, to use the Fed’s language, its so-called “data dependence” — and more about risk management, according to HSBC’s Kevin Logan.
This is the so-called third mandate that some commentators argue the Fed has unofficially adopted, in addition to full employment and stable prices (which the Fed has defined as 2% inflation).
Logan wrote to clients that if global markets remain stable and oil prices stop lowering inflation expectations, the Fed will have less financial risk to manage by June and proceed with raising rates.
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