·
Clues on unemployment
and Brexit views may be important
·
Dot-plot update may
reflect slower rate hikes in 2017, 2018
Chair Janet Yellen’s Federal Reserve wraps up a two-day meeting
on Wednesday in Washington. Officials are expected to debate whether the economy
can handle another interest-rate increase after they hiked in December for the
first time in almost a decade.
The Federal Open Market
Committee’s deliberations come as the central bank receives conflicting signals
about the economy’s strength: A comprehensively weak May jobs report contrasts
with strong spending. Economists and investors don’t expect a rate increase
this week, and will look to the Fed’s statement, quarterly economic projections
and Yellen’s press conference for hints at future timing and pace.
Here’s what to watch for
when the Fed releases its statement and economic projections at 19:00 GMT and
Yellen speaks at 19:30 GMT in Washington.
Labor
Market vs. Growth.
Fed officials will almost
certainly revisit the statement’s first sentence, because job gains have slowed
-- averaging 81,000 per month in April and May, after a pace of 196,000 in the
first quarter -- even as consumer spending accelerated and confidence
has remained high. A strong consumer should help economic growth rebound
in the second quarter after a lackluster start to 2016.
What’s really important
is how Fed officials characterize the labor market change: Do they see it as a
blip, or a more fundamental slowdown? If they’re looking for more clarity, how
much more data do they need to see?
“We will be looking for
exactly how they detail the recent weakness in the economy,” said Lindsey
Piegza, chief economist at Stifel Nicolaus & Co. in Chicago, specifically
pointing to the labor report. “The Fed will be much more willing to jump back
on the bandwagon of a near-term interest rate increase if they see this as
isolated.”
The Dots
The Fed’s so-called “dot
plot,” released alongside the statement with quarterly economic forecasts,
shows the pace of interest-rate increases that central bank officials expect
will be warranted. In March, the median projection fell to two quarter-point
hikes this year, versus a prior expectation for four.
If that falls further, it
could be an important dovish signal. If officials maintain the call for two
increases at a time when markets are looking for no more than one, they
could force investors to reassess.
Fed officials in March
also projected four rate hikes in both 2017 and 2018. Any further reduction
would show tightening will be even more gradual than the already-slow pace
they’d anticipated.
Goldman Sachs economists
Zach Pandl and Jan Hatzius expect the median fed funds rate outlook for this
year will be unchanged and the pace of later increases will probably come down.
“The risks to the 2016
projections are likely skewed to the downside: if many participants see
September as the appropriate time for the next rate increase, they may only
show one hike for the year, as there may simply not be enough ‘time on the
clock,’” they wrote in a research note last week.
Brexit
Outlook
A potential British exit from the European Union will loom ominously
over the June meeting. It could be one factor dissuading policy makers from hiking
rates, and may prompt them to tweak the global-developments portion of their
statement -- though they probably won’t address it by name.
The U.K. is holding a
referendum on whether to remain in the EU on June 23, andvolatility is stirring
in global markets as more polls lean toward a “leave” vote.
The Fed demonstrated last September that
it reacts to global financial developments, which can affect both credit
conditions in the U.S. and demand for American products abroad. Yellen earlier
this month said that
a Brexit could “shift investor sentiment” and might carry “significant
economic repercussions.” There’s a good chance she’ll be asked to comment
further in her post-meeting press conference.
Inflation
Expectations
The Fed might revisit its
take on inflation expectations: In a June 6 speech in Philadelphia, Yellen said that “it is still my judgment that
inflation expectations are well anchored” but “continued low readings for some
indicators of expected inflation do concern me.” Days later, the University of
Michigan’s survey showed that consumers’
long-term inflation outlook had fallen to the lowest level in records that go
back to 1979.
Neil Dutta, head of U.S.
economics at Renaissance Macro in New York, called the inflation expectations
language “the key thing to watch” at this meeting, writing in a research note
that if it’s little changed, it would “be sending an unnecessary hawkish signal
to the capital markets.”
Actual
Inflation
If inflation expectations
are getting the Fed down, price pressures themselves should provide a salve.
The Fed’s preferred inflation index has averaged 1 percent so far this year,
still below the committee’s 2 percent goal but way better than the 0.3 percent
average in 2015. What’s more, energy prices are moving back up and dollar
strength has waned a bit.
Yellen’s
Tone
When Yellen delivers prepared remarks and takes questions,
investors will be watching for more clarity on the what the statement means.
Crucial: any clue about whether July is on the table for a rate hike or whether
the Fed will need more than one month’s data to determine whether the economy
-- in particular the labor market -- is holding up. That’s what Gennadiy
Goldberg, interest-rate strategist at TD Securities LLC in New York, said he’ll
be looking for.
“Does one good payroll
report start to show you that the trend is moving higher again?”
Source: bloomberg.com
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