Investing.com – With markets dismissing the possibility of a rate hike by the Federal Reserve (Fed) on Wednesday, analysts focused on whether or not the U.S. central bank will choose to leave the door open or closed for a possible move at the next meeting in June.
Markets and analysts were at odds with each other with federal funds rates pricing in the possibility of an increase in rates at the June meeting at only 20%.
However, 50 out of 80 economists polled by Reuters expected the move by the Federal Open Market Committee (FOMC) that decides the central bank’s monetary policy to come in June, according to a poll published on Friday, while a separate survey from The Wall Street Journal earlier in the month gave similar results with 75% betting on the move.
Furthermore, Boston Fed president Eric Rosengren who has the right to vote this year on the FOMC warned for a second time last week that financial markets were too pessimistic.
"While I believe that gradual federal funds rate increases are absolutely appropriate, I do not see that the risks are so elevated, nor the outlook so pessimistic, as to justify the exceptionally shallow interest rate path currently reflected in financial futures markets," Rosengren said.
In this regard, the experts at Danske Bank pointed out that “the big question is whether the Fed will keep the door open for a June hike or not.”
In general, analysts noted that they will be watching the wording of the FOMC statement released on Wednesday with particular attention to the evaluation of risks.
In the March statement, the FOMC asserted that “global economic and financial developments continue to pose risks”.
“Given that the pickup in core inflation has not 'proved durable' and growth slowed in Q1, it is too early for the Fed to say that 'risks are nearly balanced', thereby implicitly closing the door for a June hike, in our view,” Danske Bank said in their report released Monday.
Morgan Stanley (NYSE:MS) clearly agreed in a preview note published on Friday, explaining that “sluggish growth and financial conditions that remain tighter than average mean the FOMC is unlikely to reinsert a balanced risks assessment.”
These analysts claimed that there would be “no signal of an approaching rate hike at the June meeting.”
Indeed, a weaker economic outlook caused the Atlanta Fed to have continuously ratcheted down its first quarter GDP growth forecast to just 0.3% as of the last release on April 19, from 1.7% in the first update after the last FOMC meeting.
But Rabobank pointed out that “part of the slowdown in Q1 GDP growth can be attributed to a residual seasonality problem that has not been solved completely."
These experts insisted that only if growth did not pick up in the second quarter would the Fed desist from two rate hikes this year, which was the median estimate in the central bank’s most recent forecast.
However, Barclays (LON:BARC) argued that “they (Fed officials) need to see evidence that the growth slowdown in the first quarter is transitory and inflation is actually firming.”
Economists from Standard Chartered (LON:STAN) also did not expect a signal for a June rate hike to come at the end of Wednesday’s meeting, but noted that expectations were already very low.
“At the margin, a hawkish surprise seems more likely than a dovish one,” they warned.