Monday, April 27, 2015

Merrill Lynch: FOMC Preview

by Bill McBride on 4/27/2015 04:40:00 PM

The FOMC meeting starts tomorrow and the statement will be released Wednesday at 2:00 PM ET. No change in policy is expected.

Here is a preview from Merrill Lynch:

At the March FOMC meeting, the Fed took any policy changes in April off the table. We don’t expect similar language about June policy at the April meeting. We do expect a more somber description of recent activity. This dovish shift in the nearterm view should translate into significantly lower odds of a June rate hike in our view. But any market participants who seek an explicit signal that June also is off the table are likely to be disappointed: the FOMC will want to maintain as much policy flexibility as possible. Fed officials also should stay optimistic about reaching their dual mandate objectives over time. The minutes, released in three weeks’ time, are once again likely to be more informative about the state of the Fed debate.

Without a press conference or updated projections in April, the FOMC statement will be the focus. The main change is likely to be an acknowledgment of the broadly weaker data for consumption, manufacturing and the labor market in recent months. The Committee may suggest temporary factors (i.e., weather and the West Coast port shutdown) account for much of the 1Q slowdown and thus leave the mediumterm outlook unchanged. Meanwhile, the recent firming of core inflation measures may give the FOMC more confidence that downside inflation risks — which rose in the March SEP — have faded. As such, we look for no significant changes in the inflation outlook, although we continue to believe the Fed is under-estimating the persistence of global disinflationary forces.

The March statement dropped “patient,” which had been generally interpreted to mean no rate hikes for the current and subsequent meeting, in order to have more flexibility for setting policy at the June meeting and beyond. To make certain the markets didn’t misinterpret the change in guidance as a sign of imminent liftoff, the FOMC stated that an April rate hike remained “unlikely” and that dropping “patient” did not mean the FOMC had decided on the timing of liftoff. As these clarifications are no longer needed, we expect they will be dropped. The statement may add that the Fed anticipates a “gradual” normalization process, to complement existing language that economic conditions may warrant lower-than-normal policy rates for some time. We expect no changes to the reinvestment program.