Fed Keeps Options Open

The Federal Reserve stuck to its position.  The weakness of in the US economy "during the winter months" was partly a reflection of transitory factors.  The Fed keeps the focus on economic data and does not provide fresh clues into the timing of its lift-off.  The dollar, which was on or near its lows before the Fed's statement is bouncing back.    The debt market was little changed.

There is nothing really new in the Fed statement. It formally recognizes that growth has slowed, but nothing beyond what various officials have already acknowledged. The Fed statement remains cautiously optimistic that with policy still very accommodative, that economic growth will return to a moderate pace, and that the labor market "will move toward levels the Committee judges consistent with its dual mandate.

The Fed's view of inflation is interesting.  Even though some inflation indicators have been a little stronger than the market expected and the University of Michigan's survey of inflation expectations have fallen, the Fed anticipated inflation to remain near its recent levels in the near-term.  It says that surveys show inflation expectations remain stable, but market-based measures remain low. Ironically,  market-based measures, are increasing.  The 10-year break-even, for example, has risen from 1.65% at the March meeting to over 1.90% today. 

The Fed's forward guidance is little changed.  It wants to see further improvement in the labor market and wants to be "reasonably confident" that inflation will move toward its target over the medium term.    We expect that this will indeed be the case in the coming months.  We note that the four-week moving average of weekly initial jobless claims made a new cyclical low recently and the labor component of the flash service PMI was the strongest in seven months. 

We think the Federal Reserve still has a tightening bias, which is to say it is looking for an opportunity to hike rates.  We anticipate June remains the first opportunity, but September may be a preferable time frame. 
Fed Keeps Options Open Fed Keeps Options Open Reviewed by Marc Chandler on April 29, 2015 Rating: 5
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