Home Economy Fed to signal rate-hike plan in place despite soft economic data

Fed to signal rate-hike plan in place despite soft economic data

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         Fed to signal rate-hike plan in place despite soft economic data

The Federal Reserve will signal no change in its plans to gradually raise interest rates despite recent weakness in the economy.

The Atlanta Fed’s tracker for the first-quarter forecasts a mere 0.2% growth rate after the latest round of data. The government will release its first estimate of GDP growth on Friday morning.

Fed officials have said repeatedly they believe the economy’s sluggish performance so far this year is temporary.

Chicago Fed President Charles Evans, a voting member of the Fed who has been dovish in the past, said recently that he has more “confidence” in the economy.

While markets have gotten used to the Fed pulling back from hiking rates at the first sign of the economy softening, Fed Chairwoman Janet Yellen and her colleagues are now seen as less skittish, economists said.

Economists surveyed by MarketWatch see growth rebounding to a 2.8% rate in the second quarter.

“The bar to disrupting the Fed’s plans is higher now that it was in previous years,” said Rob Martin, an economist at Barclays, in a note to clients.

The Fed envisions two more rate hikes this year and economists and the market see quarter-point moves in June and September.

There is unanimous agreement that the Fed will hold rates steady at the end of the meeting because it comes so soon after the central bank tightened policy in mid-March, the second rate hike in 12 weeks.

The central bank will release a policy statement Wednesday at 2 p.m Eastern. There will not be a Yellen press conference or updated economic forecasts.

With the market placing a greater than 50% probability on the next hike coming in June, the Fed does not have to send a very strong signal in the statement, said Julia Coronado, chief economist at MacroPolicy Perspectives.

Ellen Zentner, chief U.S. economist at Morgan Stanley, agreed: “the Fed need only deliver a benign statement.” That would only have to change close to the June meeting, she added.

While President Donald Trump’s tax plan is sure to be a hot topic at the Fed meeting, it will not force the central bank to alter their strategy of gradual rate hikes, analysts said.

Trump’s tax plan “looks more like a wish list” than anything that can pass the House or Senate, said Robert Barbera, codirector of the Center for Financial Economics at The Johns Hopkins University.

Mark Doms, an economist at Nomura, called the Trump plan “skeletal.”

The Trump plan is similar to his campaign tax plan that was estimated to boost the deficit by $6 trillion over ten years, Doms said.

If such a plan was seen as likely to pass Congress, the Fed would have to respond with a more pronounced path of rate hikes, Barbera said.

But given that there is not much chance of this plan passing, “I don’t think the Fed does anything with it,” he said.

Investors will be looking for clues from what Fed officials say in speeches and interviews following the meeting about plans to shrink the central bank’s massive $4.5 trillion balance sheet, said Zentner.

“If the clues aren’t forthcoming, investors will expect to see them in the FOMC minutes released on May 24, she said.

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