The Federal Reserve will deliver its latest policy statement and economic assessment today at 2:00 pm in Washington, followed by Chair Janet Yellen’s press conference at 2:30 pm. Central bank policy pronouncements have become the chief event in market analysis, trumping economic statistics and technical positioning whenever they are on the schedule.
Herewith what to look for today:
Fed Funds Rate--no change from 0.25 percent. It is now 5 1/2 years since the Fed instituted its zero rate policy. This formerly important rate has been superseded by the central bank's quantitative easing policies. Even with inflation rising, the CPI headline and core annual rates were 2.1% and 2.0% respectively in May, the bank will reaffirm its forward guidance for at least a year.
The Fed's preferred inflation measure, the core PCE price index was 1.4% y/y in April. The May number is reported on June 26, but even a jump here similar to the core CPI jump of 0.3% will be unlikely to dissuade the Fed of the necessity of its zero policy.
Quantitative Easing—the FOMC is expected to lop another $10 billion from its monthly securities purchases leaving $35 billion and an end date in December. There has been some discussion in the media that the economy might be strong enough for the Fed to increase the taper to $15 billion. That is a low probability since it would surprise the credit markets sending prices lower and rates higher, the opposite of what the Fed wants.
Unemployment--at 6.3% it is already below the Fed's former guideline of 6.5%. The FOMC has removed the specific unemployment rate reference in the statement, substituting a generalized assessment of the labor market. The Fed is now free to continue its exceptional easy money policy without labor market restrictions.
Economic Growth Estimate--The current central tendency for 2014 GDP is 2.8%-3.0%. With first quarter growth at -1.0% and likely to drop to -1.5% to -2.0% when the final revision is issued on June 25th even the lower limit is now highly unlikely.
The U.S. economy would have to expand at 4.23% for the remaining three quarters to reach 2.8%, even if it first quarter GDP came in at the best estimate of -1.5%. The American economy has not grown at that pace in over a decade and in current economic, political and financial circumstances expecting it to do so is pure wish fulfillment.
The Fed has been consistently optimistic in its predictions of U.S. economic growth over the last five years. Still the arithmetic is inescapable. There is a better than even chance that the Fed will drop its tendency to 2.6% to 2.8% or further, blaming the winter for the first quarter's contraction while claiming that the economy will grow at 3.0% or better in the second half of the year
Press conference--Ms Yellen has become more sure-footed in her responses since her first appearance when she bruited a mid-2015 date for rate hikes and shocked the markets. With inflation rising rapidly, past economic growth slower than predicted and future growth like to be affected by the impact of rising food and energy prices on consumption these concerns could work their way into Ms Yellen's answers. The more stated these worries the greater the potential market effect.
Chief Market Strategist
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