WASHINGTON, D.C.: The Federal Reserve dropped its reference to staying patient before raising interest rates in its policy statement in March.
But signs are, that could be its stance on Wednesday, when it concludes a new two-day monetary policy meeting amid a US growth slowdown and a potential financial eruption from the Greek crisis.
The Federal Open Market Committee (FOMC), led by Fed Chair Janet Yellen, has put much of the financial world on edge for months waiting for its first rate hike in nearly nine years.
Since last year, it has indicated mid-2015 for increasing the benchmark federal funds rate from zero percent, where it has stood since December 2008 to bring the US economy back from a disastrous recession.
That would start a slow tightening of monetary policy, which could see the federal funds rate around one percent at year-end.
The removal of the pledge to remain “patient” from the policy statement last month was a clear indicator that the first rate hike could come as early as June, Yellen said at the time.
But since then, economic conditions have eased, with the strong dollar—itself a function of expected rising rates—hitting US sales abroad, with inflation still extremely low, and with the US labor market showing some weakness.
That, and concern that Greece could default on its debts within weeks and spark more financial turmoil, are strong reasons why the FOMC might seek to temper expectations about a June hike this week, according to analysts.
‘Shifts in tone’
Speeches by central bank officials in the past few weeks showed “shifts in tone suggesting the Fed is prepared to be patient again,” said Chris Low, chief economist at FTN Financial.
Patrick Newport and Stephanie Karol at IHS Global insight said policymakers are trying to determine how much of the slowdown in the first quarter was due to the bad winter or to the stronger US dollar, dock strikes on the West Coast and a drop in oil prices.
“Recent economic data are not providing much clarity,” they said.
“We expect that second quarter economic activity will be stronger than in the first quarter, paving the way for a rate hike in September, but the Fed will have to feel confident in ongoing economic strength.”
But some of the decision hinges on just how anxious the FOMC is to get the very first increase out of the way, so jittery markets can focus on the medium-term trend rather than the ice-breaker.
“Rates can’t stay at zero forever,” Fed Vice Chair Stanley Fischer said earlier this week.
He suggested that the Fed should not bend its policy direction for what is likely a momentary weak spot in the economy.
“We’re expecting a pick-up in growth following the first quarter,” Fischer said.
Analysts at Deutsche Bank said the key is still what inflation looks like—the Fed wants it stronger, to show the economy has momentum.
“The trajectory of inflation will be integral for determining whether interest rate normalization will begin this year,” they said.
With the impact of the oil price plunge now mostly figured in, they said, inflation should pick up toward 2 percent—the Fed’s target—by the end of the year.