Today’s Federal Open Market Committee (FOMC) statement begins to open the door to a June policy rate hike by omitting language from the previous statement in March that “global economic and financial developments continue to pose risks.” However, today’s statement does add cautionary language noting that the Fed will closely monitor “global economic and financial developments” along with the inflation indicators mentioned in past statements. The FOMC acknowledges the obvious that “labor market conditions have improved further” even as “growth appears to have slowed.” The Bureau of Economic Analysis (BEA) will release the initial estimate for U.S. Q1 GDP tomorrow, and investors – and the Fed – will learn to what degree growth in the U.S. slowed.
Today’s Fed statement suggests a door ajar, but not wide open, for a June hike. Had Chair Janet Yellen wanted to telegraph June, she would have persuaded the FOMC to either:
- Repeat language from the October 2015 statement that made explicit reference to “next meeting” as an opportunity to raise rates,
- Reinsert the so-called balance of risk assessment last seen in the December 2015 statement, which says “the Committee sees the risks to the outlook for both economic activity and the labor market as balanced.”
But neither of these expressions appeared today. Also, and quite relevant to Governor Lael Brainard’s and now Chair Yellen’s publicly expressed emphases, the Fed is now focused on measures of realized inflation, not just inflation forecasts. Today’s statement deletes language from March that “inflation has picked up in recent months,” acknowledging that recent inflation data have been soft.
In sum, Chair Yellen – who appears determined to maximize optionality – achieves just that with today’s statement. This is a committee that is likely relieved the global outlook seems more secure than it did earlier this year, and even the most dovish voting members – such as Eric Rosengren – likely want to hike at least a couple of times in 2016. But, apart from lone dissenter Esther George, the committee is not completely confident about the U.S. outlook and would like to see 2% GDP growth materialize in the data. If tomorrow’s BEA release is not inconsistent with GDP tracking estimates, GDP growth will have fallen short of the New Normal 2% threshold in two consecutive quarters and in three of the last five. Economic growth is one important factor behind that door to June being just ever so slightly open.