The FOMC meeting on Wednesday is likely to provide very little new information or to have much market impact. There will be no press conference or new projections and the statement is likely to only see very small changes.
We may see a change in language in the first line of the statement regarding the economic situation. In March, it said ‘information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions’. This will probably be changed to something like ‘information received… indicates that activity picked up again recently following the slowdown during the winter months, which in part reflected adverse weather conditions’.
The FOMC already changed its forward guidance at the March meeting and thus might also skip the last paragraph stating that the Committee has updated its forward guidance and that it does not indicate any change in the policy intentions as set forth in recent statements.
Otherwise, the statement should repeat the soft message on inflation saying that the FOMC will monitor developments very carefully for evidence that inflation is moving back towards 2% in the medium term.
Current Fed pricing points to a first hike in September 2015, which is a little later than our expectation (mid-2015), which is in line with what the Fed has been signalling for some time. The medium-term pricing of the Fed funds rate is also still below what the Fed has signalled although there is some uncertainty around its median estimate as well, as this is quite sensitive to a change in projections from one or two members. Currently, the market expectation for end-2016 is 1.90% versus the Fed’s median projection of 2.25%.
The main debate within the Fed is currently on the degree of slack in the labour market as this is crucial for when wage pressure picks up. Whether the Fed can keep the current soft path for the Fed funds rate will to a wide extent depend on the development in wage growth, as this will be the main indicator of how much slack is available.
Uncertainty surrounds whether the longer-term unemployed and those that have left the labour force due to weak demand are becoming more marginalised. If so, wage growth might pick up sooner than expected. In a forthcoming research piece, we look at this issue and conclude that risk is skewed to wage growth picking up sooner than the Fed expects, as some measures suggest the labour market is tighter than wider unemployment measures (such as U-6) are showing.
Market impact
We expect very little market impact from the Fed meeting. If anything, it may be slightly positive for the USD and support upward pressure on yields as the market is reminded of the recent improvement in the economy. But ISM on Thursday and the employment report on Friday will be much more important in setting the direction in the short term. We see upside risk to both numbers on the back of the recent improvement in jobless claims, retail sales and some regional surveys.
Danske Bank