Our economist remains of the view that the next policy move is most likely to occur at the June meeting.
Financial conditions have fully recovered (our FCI eased since March) and market inflation expectations have moved off their lows. Two obstacles remain, however. Incoming US data now points to a Q1 growth slowdown while the global growth picture remains in a precarious state. Nevertheless, the Fed is likely to downplay the Q1 growth slowdown. With the Fed’s emphasis on data dependence, the policy statement may be hesitant to offer any clues on near-term policy firming but at the same time it is unlikely to exceed dovish expectations.
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Any hawkish surprises could come from certain tweaks to the statement, eg, downplaying sluggish Q1 growth and/or a revised assessment of the balance of risks and global developments.
In summary, more constructive tweaks to the statement’s tone would be consistent with the Fed’s call for continued rate normalisation this year and a further delay would be another blow to the committee’s credibility.