An Equivocal FOMC Statement

April 27, 2016

Today’s statement from the Federal Open Market Committee neither shuts out the possibility of an interest rate hike at the June 14-15 meeting nor builds an overwhelming case for acting then unless something vastly unforeseen were to happen.  This was a two-handed explanation.

On the one hand, committee members are less worried about external risks and deleted this sentence from the prior March statement: “Global economic and financial developments continue to pose risks.”  Meanwhile, labor markets continue to improve and are projected to “strengthen” further.  Officials also anticipate a rise in inflation beyond the near term.  The framework of policy remains skewed to gradual rate normalization, an upward direction where actual hikes will be decided meeting by meeting according to the evolution of data and other developments pertaining to the central bank’s dual mandate.  Finally, Kansas City Fed President Esther George again cast a dissenting vote in favor of a 25-basis point rate hike.

On the other hand, no code language was inserted to prod the public into expecting a high chance of a June hike.  The statement released December 16, 2015 when the only rate increase was made asserted, “overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced.”  That risk assessment was dropped in the ensuing January and March statement and, no doubt to the disappointment of those wanting a rate hike in June, was not reinserted in today’s communique.  In discussing the U.S. economy, today’s statement conceds that “economic activity appears to have slowed” and specifically downgrades household spending (though saying that the determinants of consumption still look solid.  A concern expressed in earlier statements about low market-based measures of inflation compensation is repeated.  And note is made that officials plan to closely monitor inflation indicators and global economic and financial developments.

The statement does not mention the dollar’s drop since the March meeting but no doubt welcomes that along with the rebound in oil and other commodity prices.  Inflation continues to be well below target.  Officials need more confidence that inflation will rise as they expect, and that probably entails some actual acceleration of their preferred inflation indicator.  They also remain very sensitive to what’s happening in other economies and to their financial markets.

There was little market reaction to the Fed’s statement, which was not accompanied by new macroeconomic forecasts or followed by a press conference.  Given the equivocal tone of the statement, officials likely were not looking to move the market.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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