Fed Decision Day Guide: Interest-Rate Projections

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Dot Plot: What to Expect From the Federal Reserve

Here’s what to look for when the Federal Open Market Committee releases its policy statement along with quarterly economic projections at 2 p.m. Wednesday in Washington, and Federal Reserve Chair Janet Yellen holds a press conference at 2:30 p.m.

-- Policy path: With the Fed expected to hold interest rates near zero until September, investors will focus on officials’ new quarterly forecasts.

The median of the 17 committee members’ projections will probably show the benchmark federal funds rate rising to 0.625 percent by year-end, implying two quarter-point increases, according to a Bloomberg survey of economists. That would be unchanged from Fed officials’ forecasts in March.

The projections are “the last, best indication of the committee’s thinking,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

“We can argue all day whether the economy is reaching full employment and how close the Fed is to meeting their mandate, their goals for policy -- but the bottom line is, where do they see rates headed and how fast?” he said.

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, will also be looking for a change in the number of officials who predict fewer than two rate increases this year. If three or more officials join them, that could signal that Yellen’s inner circle views a September move as less likely, according to Feroli.

September Liftoff

“Our baseline view is that only two participants join the less-than-two hikers –- implying that the leadership is still at two hikes and a September liftoff,” Feroli wrote in a note to clients. “But there is a non-negligible risk that more than two participants drop down to below two hikes.”

-- Data Dependent: At her press conference, Yellen is likely to be pressed on the most likely date for liftoff. She will probably repeat that rates can be raised at any of the four meetings left this year, depending on how the economy evolves. On May 22, she said it would be appropriate to lift off this year provided the economy improved as she expected.

“It will be the data, and not committee members’ expectations alone, that will drive the eventual decision to make an adjustment to policy,” Lindsey Piegza, chief economist at Stifel Nicolaus & Co. in Chicago, wrote in a client note.

Yellen may also stress that a weak first quarter was due to largely passing headwinds, such as a drop in oil prices that curtailed energy-related investments. At the same time, she’s likely to assure investors that Fed rate increases will be gradual.

“If the data come in at a lethargic pace, this recovery still needs financial accommodation to sustain it going forward,” said Tim Duy, an economics professor at the University of Oregon in Eugene and a former U.S. Treasury economist. “That is the basic story she wants to emphasize.”

More Positive

-- Outlook for growth: While the FOMC will lower its projections for economic growth this year to reflect a first-quarter contraction, “the statement should be a little more positive,” said Jonathan Wright, a professor at Johns Hopkins University in Baltimore and a former Fed economist. “It’ll be a little more positive on consumer spending in particular, but also on the labor market.”

Retail sales rose 1.2 percent in May, prompting forecasters to boost estimates for second-quarter economic growth. Employers added 280,000 workers to nonfarm payrolls last month, more than predicted by economists, and average hourly earnings climbed 2.3 percent from a year earlier, the biggest increase since August 2013.

Oil Costs

-- Price outlook: A recent increase in oil prices will probably give officials more confidence that inflation is likely to start moving back toward their 2 percent goal, according to Kris Dawsey, an economist at Goldman Sachs Group Inc. in New York. “The FOMC should view recent developments on this front positively,” he wrote in a June 12 note to clients. Still, he said, it will probably keep inflation forecasts unchanged.

The Fed has said it wants to be “reasonably confident” inflation is heading up toward its goal before raising rates. The Fed’s preferred gauge of prices rose 0.1 percent in April from a year earlier and has lingered below the Fed’s target for three years.

(Corrects employer of Lindsey Piegza in ninth paragraph in story publish on June 16)
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