Fed Policy Meeting: When Hawks Cry – BMO CM
Sal Guatieri, Senior Economist at BMO Capital Markets, suggests that
despite vastly improved financial conditions, faded concerns about
China, and weaker deflationary pressures amid rising resource prices and
a sagging dollar (down 5% on a trade-weighted basis since January’s
13-year high), no one on the planet expects the Fed to lift rates on
Wednesday.
Key Quotes
“In fact, the
recent U.S. economic data weigh more toward a rate cut than an increase
(ergo, the futures market pricing in a 2% chance of such). This won’t
happen, but the data clearly raise doubts about a June hike. Although
the apparent downshift in GDP growth to around 1% (or less) in Q1 is
unlikely to last, the FOMC will seek some assurance of a rebound before
pulling the rate trigger again. This could require more than seven weeks
of better data.
Here’s what to look for in the press statement
to handicap the odds of a June move. If the statement downgrades the
assessment of recent economic growth from “moderate” and retains the key
phrase: “global economic and financial developments continue to pose
risks”, then you can likely sweep June off the table. Instead, if it
removes this phrase and qualifies the recent economic slowdown as
temporary, then June will remain in play. Additionally, while Kansas
City’s George looks to dissent again in favour of higher rates, don’t
expect anyone else (notably Cleveland’s Mester) to join her given the
recent soft data.
We continue to cling to a June hike.
Admittedly, much more needs to go right than wrong in coming weeks. At a
minimum, the downside surprises in the data must end, and the return of
investor risk appetite must solidify. Based on her watershed speech of
March 29 (aptly titled “The Outlook, Uncertainty, and Monetary Policy”),
Chair Yellen wants some assurance that financial markets won’t turn
sour again. So, we wouldn’t fall off our chairs if the Chair opts to
stand pat again in June, or July, or even September.
But if
growth rebounds moderately, joblessness declines further, and financial
conditions remain supportive (as suggested by our index after turning
negative earlier this year), then June will remain a “live” meeting. A
rate increase here would mark six months since the inaugural tightening
move in December… and start another six-month countdown before the next
move.”
