Amid quiet markets this morning, here is a quick snapshot of what we expect later this afternoon in the Federal Open Market Committee statement:
** The FOMC, we believe, will want to modestly nudge market expectations and pricing towards the possibilities of a June meeting rate hike. That said, the data do not support going as explicit in the statement language as they did last October, and we don’t think the FOMC will want to signal anything about June with any certainty. We suspect the Committee will thus opt to simply acknowledge the softer first quarter but affirm they believe it will prove transitory and to take the global risk factor down a notch, perhaps to “monitoring,” in the statement language. We doubt the Committee majority feel certain enough to bring back a “near balance” assessment of risks.
** One concern likely to thread across the discussions today is that a statement deemed neutral by the markets could push the pricing for a rate hike further out the horizon, something no one in the FOMC would want to see, even the more cautiously dovish. We also suspect a statement seen as too neutral would draw a lot of arguments by the more hawkish-leaning Committee members and could perhaps even draw a second dissent. It is one more reason why we think the consensus will be found in toning down the global risk sentence in particular, which again, will be meant to signal a June rate hike is on the table.
** Indeed, it remains our sense a Committee majority would like to raise rates a second time in their policy normalization process at the June meeting, assuming the data unfolds in line with the forecast. If the data in May do indeed cooperate, we would expect to see a high profile speech or testimony by Chair Janet Yellen to hawk up the policy messaging going into the mid June meeting. In that sense, the FOMC April meeting statement would serve as a messaging bridge to clearer data in May (SGH 4/22/16, “Fed: April Messaging”).
** And again, as we have written previously, the driver to a June rate hike, and the desire to position the market and prepare the emerging market countries for it, is to defend and reinforce the policy normalization strategy. The FOMC could certainly aim to raise rates in September rather than June – we put low odds on the July fallback – but unless the data does turn softer still, a Committee majority would be concerned excessive caution could throw the entire policy framework into doubt.
** And one last point for down the road: besides data that could still turn softer than expected, one other development that could give the FOMC pause on June would be market volatility in the weeks running up to the June 23 vote in the UK on whether to exit or stay in the European Union. For now, our sense is that most Fed officials do not expect a Brexit or for the market volatility to get excessive, and it is the latter that is key to the Fed’s policy decision, not what the British decide about their European fate.