While still not introducing a balance of risks assessment, today’s updated policy statement keeps the Fed in position to consider a June rate hike if conditions warrant.
As was widely expected, the Federal Open Market Committee (FOMC) decided to leave the federal funds target rate unchanged as officials continue to evaluate incoming data for greater conviction on where the U.S. economy is heading after what is expected to be a soft quarterly GDP growth rate to start the year. The updated assessment of the current economic backdrop was downgraded with the Fed noting that growth in household spending moderated, in addition to the ongoing soft spots of business fixed investment and net exports. Recent data prints suggest the weakness in both net exports and business fixed investment could be repeated in the second quarter. Tempering the obvious Q1 slowdown, the Fed highlighted continual improvement in the labor market as well as solid gains in households’ real income. Both acknowledgements appear to imply that the Fed believes consumer spending growth may pick up and, therefore, help lead to a Q2 GDP growth rebound.
The key focus of the statement was the updated treatment of risks to the outlook for economic activity and inflation. The key sentence from the March statement on “global economic and financial developments continue to pose risks” was removed. Instead, it was changed to the Fed will be “monitoring” the aforementioned, with the addition of inflation indicators. In our opinion, the updated policy statement remains constructive to our view that U.S. economic conditions will continue to evolve in a direction that places the Fed in a position to consider a near-term rate hike, if conditions warrant. Activity abroad, financial developments and inflation appear to be the key sign posts for whether such a move can occur. Although we did not get the outright assessment of the balance of risk statement that will likely be required to lift interest rates, the statement did not remove the possibility of a June hike. Data performance over the next two months will tell us whether that possibility exists.
Reference: Wells Fargo Research Team
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