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What You Should Watch for at Fed Meeting

What You Should Watch for at Fed Meeting

By    |   Tuesday, 26 April 2016 07:25 AM

Here are three things to know about Wednesday's meeting of the Federal Open Market Committee, the Federal Reserve's closely watched policy-making body.

1. Fed officials are likely to set the stage for a possible interest rate hike at their next meeting, in June. They mainly will be motivated by three factors: a further strengthening in labor market conditions that also improves the outlook for wage growth; the recent significant easing in financial conditions, including easier access to borrowing  for corporate and mortgage financing; and, more generally, the central bank's eagerness to continue the process of careful monetary-policy normalization after so many years of experimentation.

Nonetheless, the Fed will not close off any policy options at this point. Officials will make clear that their decisions, including whether to raise rates in June, remain "data dependent." As a result, they will signal that a June hike is not a certainty, but only has evolved from less likely to more likely.

2. Such a conditional policy stance on the part of the Fed is less dependent on the domestic context than it is on events in the rest of the world -- such as economic slowing, as well as non-economic uncertainties, including the U.K. referendum on exiting from the European Union scheduled for June 23. The "old" Fed -- an institution that was both more domestically oriented and willing to lead markets -- would decide to raise rates at this meeting. In fact, some officials (but not the majority) might already be amenable to doing so on Wednesday. 

But high international uncertainty and some excessive valuations mean the Fed is reluctant to surprise markets -- especially with memories of the market disruptions in January and early February still fresh.

3. Although the Fed will draw the attention of market participants, the most interesting event this week may be the Bank of Japan's meeting on Thursday. That central bank faces an extremely tricky policy decision, amplified by downward pressures on inflationary expectations and the recent appreciation of the currency. Both accentuate the threat of a deepening deflationary trap. Yet, judging from the responses to the bank's previous dramatic policy actions -- including a surprise reduction to negative nominal rates --- it seems to be the monetary institution that has moved closest to the danger point where its policy intervention is not just becoming ineffective but even counter-productive. As a result, its actions will be closely watched by others, particularly the European Central Bank, whose officials are correctly  concerned about heading down a similar road when expanding their unconventional policies.

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

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Here are three things to know about Wednesday's meeting of the Federal Open Market Committee, the Federal Reserve's closely watched policy-making body.1. Fed officials are likely to set the stage for a possible interest rate hike at their next meeting, in June. They mainly...
fed, yellen, rates, meeting
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2016-25-26
Tuesday, 26 April 2016 07:25 AM
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