Today, the Federal Reserve’s (Fed) policy arm, the Federal Open Market Committee (FOMC), begins its third of eight regularly scheduled meetings for 2017. The meeting will conclude tomorrow (Wednesday, May 3) and the Fed will release its customary brief policy statement at 2 p.m. ET. Tomorrow’s policy statement will not be accompanied by new economic forecasts, rate path expectations (the “dot plots”), or a press conference by Fed Chair Janet Yellen, all of which only take place every other meeting. As a result, this meeting may provide little for markets to respond to, and market participants will have to parse the brief policy statement to gain any further insight into the Fed’s intentions.
With low expectations for a policy change, analysis will focus on any signals that suggest the FOMC is trying to talk down (or up) expectations of a rate hike at its next policy meeting, which will take place June 13-14. Markets will be looking for any signs of wavering resolve after a prior meeting that saw a carefully worded but meaningful upgrade in the Fed’s assessment of its preferred measure of inflation, the consumption expenditure price index. The March 15 statement made four key changes to its inflation language, which together indicated that inflation was no longer just moving toward the Fed’s 2% inflation target; it was already there, even if only if temporarily:
- Rather than saying inflation is “still below” the target, the statement had inflation “moving close” to the target.
- When reviewing inflation expectations, rather than saying inflation “will rise” to the target, the statement had it “stabilizing around” the target.
- Rather than stating accommodative policy will support a “return” to target inflation, it had policy supporting a “sustained return.”
- Finally, when it came to monitoring future data, the new statement removed the introductory phrase, “in light of the current shortfall of inflation from 2 percent.”
These are all small changes, but these statements do their work by small changes and cumulatively they sent a strong signal of a shift in the Fed’s evaluation of the current inflation regime.
Any change in language, however, will likely take place in the economic assessment rather than around inflation. With an explicitly more optimistic view unlikely, the most aggressive statement the Fed could make may be largely staying the course on its economic assessment despite a month of somewhat soft economic data, including the advance estimate of gross domestic product (GDP) growth for the first quarter and the Employment Situation report for March. A neutral tone will likely lead Fed watchers to keep a closer eye on the tone of Fed members’ speeches as we move towards the June meeting. Speeches played an important role in preparing markets for the prior hike, which came earlier than many had expected. A more moderate economic assessment, by contrast, may be an early signal that a hike in June would require meaningful improvement in economic data.
Given the absence of updated projections, the release of the much more detailed meeting minutes on May 24 may be more likely to move markets than tomorrow’s statement. The minutes may provide further insight on the ongoing conversation about the timing of reducing the Fed’s balance sheet, as well as offering a first glimpse of the Fed’s response, if any, to the Trump administration’s initial sketch of its tax reform proposal. What is almost assured in all cases is that the Fed will continue to emphasize that any decision will continue to be data dependent.
The economic forecasts set forth in the presentation may not develop as predicted.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The eleven-person FOMC is composed of the seven-member board of governors, and the five Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other regional Federal Reserve Banks rotate their service in one-year terms.
The monthly jobs report (known as the employment situation report) is a set of labor market indicators based on two separate surveys distributed in one monthly report by the U.S. Bureau of Labor Statistics (BLS). The report includes the unemployment rate, non-farm payroll employment, the average number of hours per week worked in the non-farm sector, and the average basic hourly rate for major industries.
Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
Personal Consumption Expenditures (PCE) is a measure of price changes in consumer goods and services, targeted towards goods and services consumed by individuals. PCE is released monthly by the Bureau of Economic Analysis (BEA).
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