Fed Decision Day Guide: From Rate Patience to Too-Low InflationChristopher Condon
Here’s what to look for when the Federal Open Market Committee releases its policy statement at 2 p.m. on Wednesday in Washington. There will be no press conference and no new economic projections.
-- Rate guidance: Policy makers will retain language pledging to be “patient” on the timing of an interest-rate increase as they assess the impact of a slowing global economy on the U.S., economists said. Officials have said they expect to raise rates this year for the first time since 2006.
“The Fed still wants to put out the message we’re on this glide path to higher rates, but they will be worried about what goes on in the rest of the world,” said Lee Ferridge, head of macro strategy for North America at State Street Corp. in Boston. “There are so many conflicting data, I don’t think we’ll see a lot of change,” in the statement, he said.
Fed Chair Janet Yellen said in December that being “patient” meant the committee was unlikely to raise rates “for at least the next couple of meetings,” or not before late April.
Data released today indicate consumers are growing more upbeat even as the global slowdown takes a toll on business spending. Consumer confidence in January rose to the highest level since August 2007 on improving job prospects, the Conference Board reported. Orders for business equipment unexpectedly fell in December for a fourth month, according to Commerce Department figures.
The FOMC’s assessment of the U.S. economy “should continue to sound upbeat, perhaps even more upbeat when it comes to household spending,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a note to clients before today’s figures.
-- The European Central Bank’s decision last week to embark on quantitative easing could give the Fed more confidence in the global outlook, said Roberto Perli, a former associate director of the Fed’s Division of Monetary Affairs.
“The ECB greatly reduced the risk of a bad outcome in Europe,” Perli, a partner at Cornerstone Macro LP in Washington, told clients in a video presentation. “Financial conditions are easing, yields are going down, oil prices are going down. This more than offsets the negative impacts of the dollar.”
The ECB’s decision to battle low inflation by purchasing 1.1 trillion euros ($1.2 trillion) in bonds through September next year is adding to upward pressure on the dollar, threatening to make U.S. exports less competitive. At the same time, lower bond yields are making it cheaper for companies to borrow.
-- Inflation that’s lingering below the Fed’s 2 percent goal won’t stop it from raising rates this year, according to a narrow majority of economists in a Bloomberg survey.
Some 45 percent of 53 economists in the survey said the Fed will raise its benchmark lending rate in June. Six percent said July, while 30 percent predicted a move in September. Seventy-two percent expect the FOMC statement Wednesday won’t signal growing concern over too-low inflation.
“The core issue is wrapped around inflation and inflation expectations,” said Richard Hoey, chief economist at Bank of New York Mellon Corp. “They have a lot of time to wait for data before they have to do anything too overt.”
Prices as measured by the Fed’s preferred gauge rose 1.2 percent in November from a year earlier and have been below the central bank’s target for 31 straight months.
In December, the FOMC said it “expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”
Still, a decline in inflation expectations “may tip the scale in the direction of downside risks,” said Aneta Markowska, chief U.S. economist at Societe Generale SA in New York. The FOMC “could very well acknowledge in the statement there is increased downside risk.”
A gauge of expectations for inflation starting five years from now, based on Treasury securities, has dropped almost 0.4 percentage points to around 1.8 percent in the past three months.