WASHINGTON, D.C.: Weak inflation is expected to be the key topic when the Federal Reserve opens a two-day monetary policy meeting Tuesday, its first since its historic interest rate rise in December.
Coming less than a week after the European Central Bank signaled it could expand stimulus measures in March if inflation slows further, the Fed is not expected to take any policy action.
With its first interest rate increase in over nine years in place for just six weeks, the Federal Open Market Committee, the Fed’s policy board, will continue to study how it impacts the US and global economies.
But nerve-wracking global market volatility and plunging oil prices should have the US central bankers reviewing the measured confidence they expressed last month after lifting the near-zero benchmark federal funds rate by a quarter point.
Significantly, since the December meeting several Fed officials have made clear they view deflationary pressures as a significant risk despite other signs, like job creation, that point to firm economic growth.
Oil prices fell by nearly 20 percent in the four weeks after the last FOMC meeting, and although Fed officials have said they expect the impact of weak oil prices to be transitory, there is still no clear bottom for the crude market and, in turn, the drag-down on inflation.
So eyes will be on how the FOMC’s policy statement assesses the risks that prices broadly could continue to fall.
“With global equity markets down substantially over the last several weeks, the US dollar reaching new cyclical highs, and a clouded inflation outlook, the FOMC statement should strike a more cautious tone,” said Deutsche Bank US economist Joseph LaVorgna in a client note.
Need a clearer picture
In December the FOMC’s forecast implied four quarter-point rate increases through this year to end with the benchmark federal funds rate around 1.25 percent.
But if inflation remains as weak as it appears, rates could rise much more slowly.
The global outlook has dimmed in recent months, with the greatest concern about slowing
growth in China and stalls in other large emerging-market economies such as Brazil and Russia.
Last week the International Monetary Fund cut its forecast for global economic growth this year to 3.4 percent, an improvement from 3.1 percent in 2015 but still 0.2 percentage point below what it predicted in October.
It projected the United States would grow only 2.6 percent, 0.2 percentage point less than previously expected due to the strong dollar’s hit on US exporters.
US jobs growth was solid in December and unemployment held at a seven-year low of 5.0 percent.
But there were some signs of weakness in consumer spending and industrial spending.
US consumer prices fell last month overall, and core prices, stripping out food and fuel, rose only 0.1 percent. The Fed has kept monetary policy very loose aiming to push inflation up to around 2.0 percent. So far, that target remains elusive.
Last week ECB chief Mario Draghi made clear weak inflation was a policy concern.
He said the ECB was “determined” to do everything in its power to push eurozone inflation back to its similar target of just below 2.0 percent.
“We have the power, willingness and determination to act. There are no limits how far we
are willing to deploy our policy instruments within our mandate,” Draghi said.
In Japan, the central bank — which meets on Thursday and Friday — is also reported to be wrestling with deflationary pressures.
Even so, said LaVorgna, with only a few weeks’ extra data to add to the picture, the FOMC is not likely to publicly alter its view of the coming year.
“It is too early for Fed officials to signal greater concern about the growth outlook,” he said.