Fed meeting as last chance to narrow gap between it and markets
As the Fed says its decision on when to raise rates will be data-dependent and made on a meeting-by-meeting basis, the chances of a hike in June have significantly decreased amid a drum-beat of weak first-quarter economic data.
The US central bank has kept rates near zero since late 2008 as part of its effort to spur the recovery from the financial crisis. Analysts now suggest September is more likely than June, while futures traders see an even later time horizon, meaning they have little trust in the Fed's message that it's moving ahead with plans for what would be the first rate hike since June 2006.
As Bank of America suggests, the Fed faces a dilemma this week: whether to accommodate market expectations of a later lift-off,
or "update their communications to nudge the market in the Fed's
direction."
Bank of America expects the Fed to lean more to the latter option.
According
to CME Group's FedWatch, futures
traders put the odds of a September hike at only 25 percent. The Fed's median federal funds rate estimate in
December is 0.625 percent, nearly double where futures contracts show
the rate that month.
The Fed could stimulate investors on Wednesday by striking a more aggressive tone on inflation.
While drastically low inflation has been among the factors holding back the Fed's lift-off plans, U.S. consumer prices edged higher for a second straight month in March due in part to a rebound in energy prices.
Central bank officials say the main factors behind low inflation - a drop in the cost of oil and a rising U.S. dollar - are temporary, and believe prices will rise once those swings level off.
