Tags: fed | economy | yellen | statement

Fed Statement Increases Odds of a June Rate Hike

Fed Statement Increases Odds of a June Rate Hike

By    |   Thursday, 28 April 2016 07:42 AM

The Federal Reserve acted as expected Wednesday: It left interest rates unchanged and used language that was somewhat more hawkish, increasing the probability of a rate increase in June.

Specifically:

Fed officials highlighted that labor market conditions have improved further, even though “growth in economic activity appears to have slowed.” This is an important distinction -- not only because employment is explicitly part of the Fed's official dual mandate, but also because it bodes well for wage increases and inflation, the central bank's second objective.

The Fed downplayed the risks posed by “global economic and financial developments” to the U.S. economy, though it said it would “closely monitor” these.

For the third time in a row, Fed officials refrained from providing guidance on the balance of risks. This will fuel speculation that the omission doesn't simply reflect a short-term decision but may indicate a desire to forgo an additional communication instrument which could risk confusing market participants, rather than inform them.

Fed officials will no doubt be encouraged by the favorable market reactions to this slightly more hawkish statement. This is especially important for a central bank that, absent crisis conditions, does not wish to be in the business of surprising markets. Instead it is happy to validate market expectations that it has helped manage in what has become a strangely intimate codependent relationship.

Seen as a whole, the Fed's message suggests that the data-dependent central bank is amplifying its signal that the June meeting is “live.” I suspect that the second rate hike in 10 years will depend on a combination of continued gradual improvements in the labor market and wage expectations, along with continued relative economic and financial calm internationally. And I suspect that a significant part of the assessment will be influenced by the behavior of the financial markets themselves.

Now attention shifts to Japan, where monetary policy challenge is significantly trickier, and the immediate signals to other central banks more consequential.

Mohamed El-Erian is the chief economic adviser at Allianz SE. To read more of his blogs, CLICK HERE NOW.

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The Federal Reserve acted as expected Wednesday: It left interest rates unchanged and used language that was somewhat more hawkish, increasing the probability of a rate increase in June.Specifically:Fed officials highlighted that labor market conditions have improved...
fed, economy, yellen, statement
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2016-42-28
Thursday, 28 April 2016 07:42 AM
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