No one seriously expects the Federal Reserve to move on interest rates this week, despite continued jawboning from several Fed members that they still expect to see multiple interest rate rises this year.
This apathy about the prospect of multiple rate rises is borne out by market participants only assigning a 19.6% probability of a move in June, which seems a long way out of sync with a lot of the recent rhetoric from a number of Fed policymakers. On the margins there are some who are leaning towards a cut in rates, albeit by 1.6%.
In recent testimony to US lawmakers Fed chief Janet Yellen went to great lengths to slap down the hawkish rhetoric coming from some of the more junior members of the FOMC. The Fed cited increasing economic risks and tight financial conditions as to one of the reasons they decided to hold back on a move in rates.
Since that March meeting the S&P500 has moved back to within touching distance of its all-time highs, the US dollar has weakened and commodity prices have recovered, easing some of the pressure on financial markets, but not necessarily on certain parts of the US economy.
All of these factors would seem to suggest that markets are underestimating the risks of a hawkish surprise when the Fed releases its statement in the aftermath of the conclusion of tomorrow’s meeting.
US policymakers are unlikely to want to remove the expectation that rates might need to rise in June and thus want to keep that option open, if only to be able to dial back on that expectation later on.
While recent jobs data has been fairly positive for the US economy and there is some evidence of rising prices, these factors haven’t been pushing wages higher. Consumer spending has also continued to remain weak, while certain parts of the US economy already appear to be in recession, if this week’s Dallas Fed manufacturing survey is any guide, while the latest durable goods numbers disappointed once again.
With that in mind it is the tone of the statement which will be closely monitored, particularly in the context of the Fed’s view of the global economy, given recent improvements in some of the recent Chinese data.
Soon after the Fed meeting concludes the Bank of Japan gets underway, with speculation rising that we could well see further easing measures, including the announcement of the central bank paying banks to lend money, with a further extension of negative rates.
The Japanese central bank in addition to cutting rates has also been buying up huge stakes in the Japanese stock market in the form of ETF’s in so far vain attempts to help boost prices and stimulate some form of inflation in the local economy.
In the wake of the recent earthquakes and weak economic data expectations are high that the central bank could announce further measures on Thursday.
This suggests that the potential for disappointment also remains high, and with the recent G20 meeting agreeing that exchange rate manipulation is not desirable, there is a chance the Bank of Japan could adopt a wait and see policy and wait until June, before moving again on further stimulus
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