Instant Analysis: April’s FOMC statement

Scott Anderson
Posted by Scott Anderson
Chief Economist

From the April FOMC statement today:

“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

View from the street of the Federal Reserve building on a sunny day.Parsing the subtle word changes in the FOMC statement, I believe the FOMC took some very minor baby steps today toward paving the way toward another rate hike before too long. Whether that hike comes as soon as the June FOMC meeting will depend on whether the economic rebound anticipated in the second quarter truly comes to pass and how strong it is. The tentative and mixed language (i.e. dovish language) in the April FOMC statement does not indicate to me that a June rate hike is the mostly likely scenario today.

What about July?

I believe a June rate hike from the Fed is probably a bit too aggressive in terms of timing, given mixed economic data in the first quarter and the uncertainty coming from international financial and economic developments.  A July rate hike from the Fed is my baseline forecast, even though the July meeting is not accompanied by a Yellen press conference or updated economic forecast or “dot-plot.”

September is a possibility as well, but that might be too long a wait for some on the FOMC, especially if we get a strong bounce in activity over the summer. I must point out that this Fed funds forecast is still more aggressive than the Fed funds futures or U.S. bond market has been pricing.  Current Fed funds futures are putting only a 21.6% probability of a June hike and a 35.4% probability it will be July.

Updates from the FOMC statement on current economic conditions highlighted the continued improvement in labor market indicators, but noted that U.S. growth has slowed and household spending has moderated, though real income growth and consumer sentiment remains high.  Moreover, business fixed investment and net exports have been soft.

Eyes on inflation, international developments

They also took out  a section of the March statement that referred to inflation picking up in recent months, a modest downgrade of their inflation assessment, noting that inflation  is running below the Fed’s 2.0% inflation objective.

They modestly reduced their concern on international developments, taking out the sentence that global economic and inflation developments continue to pose risks.  But they added, “The Committee continues to closely monitor inflation indicators and global economic and financial developments.”

Ester George was once again the lone dissent on the decision: “Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.”

U.S. stocks traded nearly unchanged following the FOMC announcement, and 10-year U.S. Treasury bond yields are about 7 basis points lower than yesterday, while the U.S. dollar is weaker.

Bottom line: The April FOMC statement didn’t provide much more clarity on the timing of the FOMC’s next interest rate move, which will probably be interpreted by the markets as another dovish statement.

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