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Preview: FOMC expected to remain patient on rates at April 30-May 1 meeting

Absent an exogenous economic shock between now and the April 30-May FOMC meeting, there is virtually no chance that Fed policymakers will alter either current interest policy or change their “wait-and-see” attitude towards future rate moves – in either direction.

There is a fair amount of economic data set for release in the days before the meeting and it will help shape the FOMC’s views on present economic conditions as the first quarter numbers close out and the early ones for the second quarter take shape. Policymakers will take into account that the first quarter felt the loss of momentum in the manufacturing and service sectors at the end of 2018, and from the 35-day partial federal government shutdown that lasted from late December through much of January. Additionally, there were a few large adverse winter weather events in February and March that probably had some regional impacts the cumulative effect of which could be visible at the national level.  However, the anecdotal evidence in the Fed’s Beige Book suggests that the economic wobbles early in the first quarter were giving way to more stable conditions and by early April were seeing at least mild growth in the affected regions.

Early market estimates for the advance report on first quarter GDP at 8:30 ET on Friday, April 26 put growth at 2.2% with help from net exports and the change in inventories. If this proves to be the case, policymakers will find it in line with forecasts for 2019 and thus see no reason to adjust their outlook for monetary policy.

Should the pace of growth disappoint, delving into the causes will probably provide sufficient justification for keeping interest rates steady for now. There would doubtless by the usual outcry that the Fed is too slow to respond to signs of an impending downturn. However, the GDP numbers will be, after all, the advance report and subject to two more revisions that could well improve the tone. Also, the first quarter has in recent years tended to be softer than expected due to “residual seasonality” that often gives way to firmer conditions in the second quarter. Finally, although the data reports are nearly caught up after the delays related to the shutdown, some numbers have not gotten their annual revisions as yet. The picture could change once these are published. Even should GDP present an alarmingly low number, it is only one quarter. There have been some brief periods of weakness over the course of the long expansion that is on the cusp of matching the 180 month record.

In any case, the Fed will stick with where the numbers are in reference to the dual mandate.

To that end, it would be hard to argue that the labor market numbers reflect anything but stretched conditions. Initial jobless claims remain at near 50-year lows and the insured rate of unemployment has been parked at its record low for nearly a year. The BLS measure of unemployment was at 3.8% in the March employment report, a level from which it is has scarcely varied for a year, moving in a narrow range of 3.7%-4.0% and undershooting the longer-run FOMC forecast for 4.3%.. The U6 unemployment rate reached 7.3% in February and stayed there in March. These are readings lower than before the recession. Workers on the margins are re-entering the labor market and businesses are hiring them.

Businesses are finding it difficult to locate qualified workers and are being forced to raise wages and benefits to attract and retain workers. In turn, improved incomes are helping to engage consumers in spending generally and enabling more to commit to large purchases like motor vehicles and homes.

Improving incomes are not pushing overall price inflation higher – yet. Some policymakers are alert to the potential if increases continue as they look to do. There are pockets of higher inflationary pressures but overall conditions remain tame. A drop in energy costs – particularly fuels – that occurred late in 2018 started to be unwound in early 2019 and has now been overtaken. Policymakers will continue to focus on core price measures that remain more-or-less in line with the Fed’s 2% objective. Publication of the FOMC’s preferred measure – the PCE deflator – has lagged the other reports more than usual. It is normally about a month behind the CPI data at the time of the FOMC meeting. The shutdown has set the BEA back in gathering and preparing the personal consumption data. However, it should be up-to-date for March when the report is released at 8:30 ET on Monday, April 29. The FOMC will be able to assess in their next deliberations.

The FOMC will likely also welcome having the first quarter Employment Cost Index numbers that will be released at 8:30 ET on Tuesday, April 30. It will provide a better sense of upward pressure for wages and benefits and the risks for these in affecting price stability over the medium term.

When the FOMC releases its post-meeting statement at 14:00 ET on Wednesday, May 1, it should echo the statement from March 20. There may be some nuance about overall economic conditions being a bit better, overall inflation seeing some transitory factors while core inflation remains tame, and inflation expectations little changed for the medium term. Its conclusions should be much the same as the March 20’s, “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

I would not expect any dissent in the meeting vote. While some of the voters are leaning more dovish on the outlook for rates and others mildly more hawkish, none are likely to view a change in rates as necessary at the present time and are content to wait on more economic data.

The next edition of the Fed’s Senior Loan Officer Opinion Survey will be presented at this meeting and will inform the discussion on financial conditions. There is no announced release date for this report, but the usual pattern points to 14:00 ET on Monday, May 6.

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