–No Change Expected To Policy Guidance In FOMC Statement
By Brai Odion-Esene
WASHINGTON (MNI) – Policy guidance from the Fed’s rate-setting
Federal Open Market Committee next Wednesday is likely to remain
unchanged following its two-day meeting, with many Fed watchers focusing
on members’ economic and interest rate projections for any hints of a
shift in their outlook for the economy.
The FOMC will meet April 24-25 in Washington, after which — in
addition to the usual statement — the Fed will release participants’
economic forecasts and expectations for the future path of the federal
funds rate.
Wells Fargo Chief Economist John Silvia said he does not see
Federal Reserve officials changing much at the meeting, as it appears
that “things are going their way,” albeit not at the pace officials
would prefer.
The FOMC, he told MNI, is in a situation where the outlook is for
moderate economic growth — consistent with their view — and inflation
staying within their target.
“The jobs market seems to have stabilized … . I don’t think the
inflation numbers have bothered them, so I don’t see that there is a big
case for them to make a lot of changes at this point,” Silvia said.
Credit Suisse Economist Dana Saporta agreed, telling MNI the FOMC
statement is likely to provide little new information, “primarily
because I think the committee itself is undecided at this point about
its next steps.”
“I think to the extent that there will be new information coming
from the FOMC on April 25 it probably would be in the economic and
federal funds rate projections,” she said.
“You would think they would change their forecasts,” Saporta
continued, noting for example that the FOMC currently forecasts the
unemployment rate coming in between 8.2% to 8.5% by end of this year,
“and we are already at 8.2% in March.”
“Similarly for 2013 the range was 7.4% to 8.1%, that range will
probably be moved down,” she added.
The question is if the economy unfolds as the FOMC’s new
projections suggest, “will it become increasingly difficult for this
late-2014 language to hold or whether the Fed will have to start
thinking about adjusting that,” she said.
Such thinking is premature at this point, however, Saporta said, as
it remains to be seen if second quarter data shows a slowdown as the
weather effects from Q1 start to wear off and if gasoline prices have a
dampening effect on consumer spending.
The Fed is trying to remain flexible, Silvia said, although the
balance of the evidence suggests the economy continues to improve.
The key will be the Fed’s assessment of the economy, he said, “that
really is the driving factor.”
“At this particular point I believe the actual economic expansion
is developing its own legs in the private sector,” George Mokrzan,
senior economist with Huntington National Bank, told MNI, and there is
less stress at the state and local government level.
So with U.S. economy improving, aided by low interest rates, “the
role for procyclical stimulus is ebbing,” Mokrzan said.
“I think the Fed right now is in a wait and see mode,” Bernard
Baumohl, chief global economist for the Economic Outlook Group, told
MNI.
He pointed to economic data indicating some strength in the U.S.
economy, which has then been countered by recent signs of, perhaps, some
weakening.
These ‘ups and downs’ signals mean the Fed is taking a backseat
until they get a clearer sense as to whether the economy is improving or
markedly slowing again, Baumohl said.
Silvia said, however, that he does not believe the Fed will have
the luxury of waiting until late-2014 before raising rates because of
inflation.
“In the future I don’t think the inflation numbers will come down,
I think you are going to see persistent inflation numbers around 2% to
2.5%,” Silvia said. “It’s not going to open up a door for the Fed to
really wait that long.”
He added that a steeper yield curve — with the market viewing high
inflation, large deficits and a growing economy as reasons to exit
Treasuries — will also force the Fed to act and hike rates.
“So I don’t think you are going to make it to 2014 with no change
in the federal funds rate,” Silvia said.
Saporta said it is likely that Bernanke, and the voters on FOMC
closest to him in thinking, “will probably argue for preserving the
late-2014 policy guidance at this time.”
Speaking to reporters after a speech to the National Economists
Club in Washington on April 12, Philadelphia Federal Reserve President
Charles Plosser said the Fed has backed itself into a corner with
regards to its declared expectation that interest rates will likely stay
low through 2014.
He noted that FOMC participants’ projections of the likely future
path of monetary policy, which will be published Wednesday along with
participants’ economic forecasts, is more informative regarding how
policy will evolve.
“If you are really trying communicate clearly about how policy is
evolving, I believe the so-called ‘dot chart’ can be very useful and
informative about offering information about forward guidance,” Plosser
said. And as it evolves over time, “it’s going to reveal views about how
the committee’s views are evolving.”
“We could have utilized that as a way to help us out of this
calendar date problem,” he said. Instead, “we’ve still got to face this
at some point.”
Saporta noted that with the FOMC’s projections for the unemployment
rates, released after its previous two-day meeting in January, proving
to be a little too pessimistic, “the markets will be looking intently to
see whether there’s been any shift in thinking among the individual FOMC
participants on the appropriate timing of policy firming.”
So while the ‘dot’ chart — showing participants expectations for
when the first rate hike — may not shift, if it does “it probably would
be in the more hawkish direction,” she said.
“The only change you might see in those dotted charts might be one
or two members of the FOMC who are going to probably argue that we ought
to raise interest rates sooner than 2015,” Baumohl said.
And with the recovery looking like it is gaining a little bit more
traction, “there may be some sense that maybe the Fed should consider
raising rates before 2015,” he added.
The minutes from the March FOMC meeting show that “While a few
participants indicated that their expectations for real GDP growth for
2012 had risen somewhat, most participants did not interpret the recent
economic and financial information as pointing to a material revision to
the outlook for 2013 and 2014.”
Baumohl said any change to the economic projections of FOMC
participants would towards “a bit more” of an optimistic outlook, but
cautioned that any change would so marginal as to not be really
significant.
In the Beige Book prepared for the April FOMC meeting, the Fed
noted that the U.S. economy continued to expand at “a modest to moderate
pace from mid-February through late March.”
This assessment will not be enough to warrant any change in the
FOMC’s central tendency forecasts, Baumohl said.
Bernanke will hold a news conference Wednesday after the meeting,
and Saporta cautioned that there is always the risk he will say
something unexpected.
“We’ll be listening closely to see if his commitment to the
late-2014 policy guidance is wavering at all,” or if he indicates that
he favors additional monetary stimulus later this year.
“Unfortunately neither of these scenarios seem very likely to us,”
she said.
In the projections released after the January meeting, FOMC
participants cut their forecasts for growth and the unemployment rate
this year, as well as their inflation outlook.
The central tendency for 2012 GDP was revised to 2.2%-2.7% from
their previous estimate of 2.5%-2.9%. The central tendency for
unemployment was 8.2% to 8.5% from 8.5%-8.7% after the November FOMC.
The band for PCE inflation this year was shifted to 1.4% to 1.8% from
1.4% to 2.0%.
And based on members’ FFR projections, MNI calculated that the FOMC
sees the fed funds rate averaging 0.35% in 2012, 0.56% in 2013, and
rising to 1.07% at the end of 2014.
** MNI Washington Bureau: 202-371-2121 **
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