Fed Decision Day Guide: Cooling Economy to Forward Guidance

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Everyday at Fed Was a Big Day: Randall Kroszner

Here’s what to look for when the Federal Open Market Committee releases its policy statement at 2 p.m. Wednesday in Washington. Officials won’t provide updated economic projections, and Federal Reserve Chair Janet Yellen isn’t scheduled to hold a press conference.

-- Economic outlook: Investors will scrutinize changes to the description of the economy for hints on the likely timing of liftoff after policy makers all but ruled out an interest-rate increase at this meeting.

Expectations for the first increase since 2006 have shifted out to September from June as the economy weakened in the first quarter, in part because of unusually cold weather. March payrolls posted the smallest gain in more than a year, and retail sales and orders for business equipment fell short of estimates.

“They’re going to indicate that the first quarter was a temporary slowdown and the economy is going to pick up steam again,” said Mark Zandi, chief economist at Moody’s Analytics Inc., in West Chester, Pennsylvania.

A report Wednesday showed the U.S. economy barely grew in the first quarter, buffeted by slumps in business investment and exports after oil prices plunged and the dollar surged. Gross domestic product, the volume of all goods and services produced, rose at a 0.2 percent annualized rate after advancing 2.2 percent the prior quarter, Commerce Department data showed.

Oil Prices

-- Inflation: Signs that consumer prices are stabilizing following a rebound in oil costs could encourage policy makers to tweak their language on inflation. While the Fed is likely to repeat that price gains remain below its 2 percent objective, it may drop language that they have fallen further below the target, according to economists at the Royal Bank of Scotland Group Plc in Stamford, Connecticut.

Prices as measured by the Fed’s preferred gauge rose 0.3 percent in February from a year earlier, snapping an eight-month slowing trend. The Fed has missed its goal for 34 straight months.

-- Labor markets: The changing employment picture will probably require a downgrade of the assessment in the FOMC statement, which in March said “conditions have improved further, with strong job gains and a lower unemployment rate.”

Policy makers may say that labor-market indicators “could be judged to be mixed, but on balance to have improved further,” Michael Feroli, chief U.S. economist at New York-based JPMorgan and a former Fed board researcher, wrote in an April 24 report.

Employers added 126,000 workers in March, the fewest since December 2013. Unemployment held at 5.5 percent, the lowest level since May 2008.

Maximum Flexibility

-- Forward guidance: Fed officials will retain maximum flexibility on the timing of tightening, according to Ira Jersey, head of U.S. interest-rate strategy at Credit Suisse Group AG in New York.

“The committee will remain dovish, data-dependent, and leave all options on the table,” Jersey wrote in a note to clients last week.

In March, the FOMC scrapped a pledge to be “patient” on raising rates, saying instead it wants to see further improvement in the labor market and be “reasonably confident” that inflation will move back up toward its 2 percent goal.

Officials may “augment the current guidance with explicit mention of a ‘gradual normalization’ process,” Michael Hanson, senior U.S. economist for Bank of America Corp. in New York, wrote in a note to clients Monday. That “should help take some of the sting out of the first hike,” he wrote.

The FOMC probably won’t rule out a June rate rise, even though odds of liftoff then are now “very low,” Hanson said.

The Fed will raise the benchmark federal funds rate in September, according to 73 percent of 59 economists in a Bloomberg survey conducted April 22-24. In Bloomberg’s March poll, a majority predicted the first increase in June or July. The rate has been kept near zero since December 2008.

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