With no new economic forecasts, or a Fed Chairwoman Janet Yellen press conference, all the information about the central bank’s thinking will have to be gleaned from the six-paragraph statement released at 2 p.m. on Wednesday.
No one expects a rate hike, because it would deviate from the “gradual” pace of tightening laid out by Yellen in March.
So what will the central bank say that differs from its statement in March?
Economists generally believe the Fed wants to signal that “gradual” means rate hikes again in June and September unless the economy tanks. Casting a cloud over this forecast is weak first-quarter growth. The Fed statement will try to signal a stay-the-course policy position.
Read: Fed to signal rate-hike plan in place despite soft economic data.
So here are some of the questions surrounding the Fed’s statement.
How will the Fed indicate that weaker data is not the start of a downward trend?
The government reported late last week that the U.S. economy bogged down to a 0.7% annual rate, the slowest growth in 3 years. But there was more. March nonfarm payrolls, auto sales, housing starts, manufacturing production and the Empire State and Philly Fed manufacturing surveys were all weaker than expected, noted economists at Bank of America Merrill Lynch.
How will the Fed signal that it is looking at the sluggish growth as temporary?
In March, the Fed said:
“Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat.”
Jim O’Sullivan, chief U.S. economist at High Frequency Economics, thinks the central bank will go back to the playbook from the statement of April 2016. The circumstances are eerily similar. At that meeting, the Fed knew the first-quarter growth was going to be slow — although the 0.5% growth rate wasn’t released until the day after its meeting.
Here’s what the Fed said:
“Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated although households real income has risen at a solid rate and consumer sentiment remains high.”
“The same points could easily be made this year,” O’Sullivan said.
Will the Fed stop holding the market’s hand?
Michael Feroli, chief U.S. economist at J.P. Morgan Chaise, said the Fed can afford not to telegraph every policy move. So the statement will be devoid of clues.
“In part, we believe the move away from explicit signaling reflects the maturing of the rate hike cycle,“ he said. Another consideration is the most recent data “make it awkward to the statement to send an explicitly hawkish message on future policy,” Feroli added.
Will the Fed mention eventual balance sheet reduction?
Not many Fed watchers expect the central bank to allude in the statement to the possible shrinking of its balance sheet in the statement.
Since December 2014, the Fed has consistently said:
“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”
Spencer Hill, an economist at Goldman Sachs, is one that thinks new language might appear. It would be “odd” for the Fed not to say anything about shrinking the balance sheet now that Fed officials are commenting on it regularly, he said.
Hill said he expects the wording to be “vague and noncommittal” and may simply repeat the phrase from the minutes of the March meeting that:
“Many participants emphasized that reducing the size of the balance sheet should be conducted in a passive and predictable manner.”
Any mention of fiscal policy?
Fed watchers don’t think the statement will make any mention of the Trump tax cut plan. “The Fed, like everyone else, has no clearer guidance on the scope of U.S. government policies than 100 days ago,” said Sal Guatieri, senior economist at BMO Capital Markets.
Will the Fed say something different about inflation?
The latest inflation data released to date has been somewhat soft. For instance, the 12-month rate of personal consumption expenditure index subsided to 1.8% in March from 2.1% in the prior month.
Read: U.S. inflation retreats in March from 5-year peak
As a result, there could be a change in how the Fed described inflation in March:
“Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2%. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”
Feroli of J.P. Morgan said he doesn’t expect much change: the statement will say that headline inflation is near the Fed’s 2% target while core inflation is running somewhat below that objective.
Will the statement tweak the balance of risk language?
Since September 2016, the Fed has said:
“Near-term risks to the economic outlook appear roughly balanced.”
Guatieri said that this code for “we’re keeping the normalization door open.” He expects the Fed to repeat this statement. This puts the spotlight on June.