The Federal Reserve’s Federal Open Market Committee kicks off their two-day meeting today amid little fanfare.
While announcements from the world’s largest and most important central bank should never be ignored, it feels as if this week’s meeting is the perfect opportunity for the Fed to practice is oft-preached wait-and-see, data-dependent outlook. Already, the central bank has explicitly ruled out an interest rate hike at this meeting, and with no accompanying press conference scheduled, the most market-moving information may emerge from how the Fed describes the U.S. economy’s poor Q1 performance.
Heading into this year, many traders assumed that the Fed would raise rates by June at the latest and that the central bank would hike rates three or four times over the course of the year. However, with the recent sluggishness in the U.S. economy (tomorrow’s advance Q1 GDP report is expected to show the economy grew at just a 1.0% annualized rate), some traders are now questioning whether the central bank will raise interest rates at all this year. While we, like the Fed, will be watching future economic data like hawks (no pun intended), tomorrow’s monetary policy statement comments on the winter slowdown and potential timing of the first rate hike will help tip the scales one way or another, with obvious implications for the value of the U.S. dollar.
In our view, the best way to handicap tomorrow’s statement is to analyze the recent public comments from FOMC voters:
- Fed Chairwoman Janet Yellen (Mar. 27): “I believe that the appropriate time has not yet arrived, but I expect that conditions may warrant an increase in the federal funds rate target sometime this year.”
- Fed Vice Chairman Stanley Fischer (Apr. 16): “We’d like to see the economy beginning to grow again and grow at a decent rate, and we’d like to see unemployment continue to come down and some signs that inflation is…heading toward the 2% target [before raising rates].”
- President William Dudley (Apr. 20): “Hopefully [economic data will] support a decision to lift off later this year… I can’t tell you when normalization will occur.”
- Governor Jerome Powell (Apr. 8): “The time [to hike interest rates] is coming, and I do expect it will be this year.”
- President Jeffrey Lacker (April 15): “I think a strong case can be made that short term interest rates should be higher right now.”
- President Dennis Lockhart (Apr. 16): “[A June rate hike is] not my preference … I think waiting a while longer improves the chances of seeing confirmation from incoming data that the economy is on the desired path.”
- President Charles Evans (Mar. 25): “I think economic conditions are likely to evolve in a way such that it will be appropriate to hold off on raising short-term rates until 2016.”
- President John Williams (Mar. 23): “I think that by mid-year it will be the time to have a discussion about starting to raise rates.”
As you can see, there’s a wide variety of views on when to hike rates, but a couple of common themes emerge. First, the central bankers remain heavily data-dependent, as we noted above. Secondly, and perhaps most importantly, enthusiasm for a June rate hike has almost completely faded after the recent slowdown (barring uber-hawk Lacker), and most voters imply that they are taking a “see it to believe it” approach when it comes to an improvement in U.S. economic data before raising rates.
Though we don’t anticipate any earth-shattering revelations from tomorrow’s Federal Reserve statement, the U.S. dollar could still see a meaningful reaction depending on how the central bank characterizes the Q1 slowdown and how the statement phrases interest rate expectations. Continued optimism from policymakers could lead EUR/USD to reverse off previous resistance near 1.1000, while a dour outlook could drive the pair through that key barrier as traders continue to push out the Fed’s rate hike timeline.