WASHINGTON, D.C.: The Federal Reserve’s capacity for patience is on the line on Tuesday when US monetary policymakers meet to discuss how soon to begin raising interest rates.
Having signaled for months that an increase in the federal funds rate could come as early as mid-year, the Federal Open Market Committee has to decide whether a recent soft spot in the economy and the soaring dollar dictate putting that trajectory on hold.
The two-day meeting ends Wednesday afternoon with a policy statement and new economic projections that will show just how confident or not FOMC members are in US growth, given the feeble state of the economies in Japan, Europe and China.
Most bets are that the FOMC will confirm its path toward a June or July Fed funds increase, by removing from its policy statement the sentence that it still “can be patient” before normalizing policy after more than six years of keeping the Fed funds rate at zero.
Fed Chair Janet Yellen has said that the increase could come within two FOMC meetings of removing that phrase, which from Wednesday would point to June at the earliest.
“With the unemployment rate already within the Fed’s longer-run range of full employment of 5.2 percent to 5.5 percent, and with the funds rate still at an emergency level nearly six years after the recession ended, financial markets should begin to prepare for higher interest rates,” said Deutsche Bank in a client note.
The Fed has stoked expectations of a hike for months. But it has also stressed that any decision is data-dependent, and that has put pause to some analysts in recent weeks, with the economy appearing to slow during the winter.
Although job creation numbers—a key guide for the central bank—have been strong, other data on consumer spending, inflation, wage growth and the housing industry have weakened in recent months.
Moreover, the Fed’s move toward tightening, while major central banks elsewhere are pumping more liquidity into their economies, has sent the US dollar soaring, which is now hurting US exports and the earnings of companies with significant business abroad.
The problem in assessing the economy, points out Steven Ricchiuto, chief economist at Mizuho Securities, is that a “disconnect” has developed between what the strong labor market indicates and the weak growth indicated by other data.
“Unfortunately, there seems to be irrational anxiety among investors and the committee that near-zero interest rates are unnatural, inflationary and have left markets dysfunctional. The Fed is therefore seen as needing to hike rates sooner rather than later,” Ricchiuto said.
Nariman Behravesh, chief economist at IHS, said that it is possible the Fed could drop the “patient” signal but still hold off until September, though he favors the mid-year call for a rate hike.
“I don’t think it’s going to delay . . . It sure looks like they are going to hike rates in June. But as long as the dollar’s strength continues, they’ve got this stiff headwind, you could see the Fed, after the first hike, proceed very slowly.”