Today, the Federal Reserve will make its interest rate decision. After the committee raised the target rate by another 25bp at the previous meeting in mid-March (to 1.50-1.75%), no policy changes are expected at the upcoming meeting.
This includes a steady fed funds target rate and a continuation of the balance-sheet adjustment. This month the Fed began shrinking its balance sheet at a monthly pace of USD 30bn. That rate automatically goes up by USD 10bn per quarter until USD 50bn is reached.
Moreover, we do not anticipate any policy-relevant changes in the post-meeting statement either. Most importantly, the Fed will reiterate that it expects economic conditions to “evolve in a manner that will warrant further gradual increases in the federal funds rate.” The statement should also once again show the committee’s increased confidence that the inflation target will be hit before long, by repeating that “Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2% objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.”
In fact, the core PCE deflator most likely rose to 1.9% or even 2.0% yoy in March – with the respective report coming out on Monday. We know from various speeches that Fed officials are rather bullish on the medium-term economic outlook, as the fiscal stimuli should lift economic growth in the next few quarters. And we do not see any reason why any committee member should have changed her or his mind. Concerns about geopolitical risks will certainly be debated once again, and there is a slight chance that a reference to trade disputes will make it into the statement. It is, however, much more likely that such a debate will only be mentioned in the minutes, and that the post-meeting statement will remain largely unchanged.
Another reason for the Fed to just reiterate its message from the previous meeting (in addition to the fact that economic developments have largely been in line with expectations) is that financial markets have now bought into the Federal Reserve’s message. Fed funds futures are currently pricing in a total of three to four hikes this year, up from a mere one hike back in September, which is broadly in line with the Fed’s latest Summary of Economic Projections.
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