What to expect in the Fed’s statement

Fed seeking to avoid market selloff while keeping option of a move in six weeks alive.

WASHINGTON — The Federal Reserve on Wednesday will leave open the possibility of a rate hike at its next meeting in June, economists said, but try to do so in a way that does not upset financial markets.

The Fed policy committee will meet on Tuesday and Wednesday and release a statement at 7 p.m. (BST) on the second day. No press conference by Fed Chairwoman Janet Yellen is scheduled. Economists do not expect the Fed to raise rates at this week’s meeting.

The Fed will leave the door “open a crack” for a move in June, said Rob Martin, economist at Barclays.

The Fed is between a rock and a hard place. Sending too strong a signal on future interest rate hikes risk spooking markets while being too soft could lead markets to price out any chance of a rate hike this year.

The Fed has penciled in two rate hikes this year while the market barely expects one move. Fed officials seem perturbed by the market’s dovish views. Boston Fed President Eric Rosengren has already said rate hikes are likely to be more frequent than the market now expects.

Analysts have differing views on what type of guidance the Fed will send Wednesday.

The central bank has several options if it wants to retain “optionality” for a move in June, said Kevin Cummings, an economist at RBS Securities Inc., in a note to clients.

One option, viewed as the most hawkish, would be to repeat what the central bank said in October, just prior to its first rate hike in December, when the Fed said it was mulling “whether it will be appropriate to raise the target rate range at its next meeting.”

Martin, a former Fed staffer before joining Barclays, thinks that language is about as close to a promise as a central bank makes.

A softer approach to signal the openness to a June rate hike would be for the Fed to add language saying the risks to the economy are “nearly balanced,” Cummins said. The Fed hasn’t described the risks to the economy in its statement so far this year, an indication that they were grim.

Or, more likely, Cummins said, the Fed could simply say that downside risks “have diminished.”

Some economists think the Fed will send no strong signals in its April statement.

“It would be too early in our view to put another rate hike back on the table,” said Aneta Markowska, chief U.S. economist at Societe Generale.

“Any such signal would likely trigger another round of volatility in the financial markets,” she added.

 

Source: Market Watch

 

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