Fed Rate Rise Unlikely Wednesday, but Possible June Move in Focus

Next to no one expects Federal Reserve officials to raise short-term interest rates at the conclusion of their two-day policy meeting Wednesday. Investors are pricing in a 95% chance that the Federal Open Market Committee leaves its benchmark rate unchanged in a range of 0.75% to 1%, according to CME.

The central bank will give an updated picture of recent economic developments, and officials could send signals about where borrowing costs are headed in the months ahead. The Fed will release its policy statement at 2 p.m. EDT Wednesday. Fed officials won't release new economic projections, and Chairwoman Janet Yellen won't hold a press conference. Here's what to watch for:

Teeing Up June

The statement could give hints about the likelihood of a rate increase at the Fed's next meeting, June 13-14. Fed officials expect to raise rates two more times this year, and investors see a 71% probability of a move by June. The officials, however, are unlikely to use language that explicitly commits to a timetable.

They will see two more monthly U.S. employment reports before their June meeting, as well as a slew of other fresh economic data. They are more likely to repeat the approach they took earlier this year. In their Feb. 1 statement, they gave no clues they were considering a rate increase at their next meeting in March. But as that meeting neared, a chorus of senior policy makers signaled they were ready to move, and on March 15 they said they were raising rates.

Economic Wobbles

Close attention will be paid to Fed officials' assessment of economic data, which has softened lately. Gross domestic product grew at a feeble 0.7% annual rate in the first quarter as consumers reined in spending. Inflation also ticked lower in March, a potential red flag for policy makers as they assess the economy's ability to withstand higher borrowing costs. The price index for personal-consumption expenditures, the Fed's preferred inflation gauge, declined 0.2% from a month earlier.

Still, the economy has continued to add jobs and consumers remain upbeat. Fed officials could signal whether they view the recent weakness as a blip or a more worrisome slowdown in the eight-year-old economic expansion.

The Balance Sheet

Many market participants will be looking for clues about when the Fed will begin shrinking its roughly $4.5 trillion portfolio of bonds and other assets. Fed officials agreed at their March policy meeting that they likely would begin shrinking the balance sheet later this year.

While officials likely are discussing the topic this week, economists have differing views on whether the Fed will tweak the language on balance-sheet policy in the statement. Goldman Sachs, in a recent note to clients, said the statement could echo language in the March minutes that shrinking the balance sheet should happen in a "gradual and predictable" manner.

But the Fed may save details of balance-sheet discussions for the minutes of the May meeting, due to be published with the usual three-week lag on May 24.

Global Growth

Despite signs economies outside the U.S. are looking stronger, central banks in Europe and Japan appear to be in no hurry to dial back their monetary policy support, given weak inflation. What's more, elections will be held in France and the U.K. in the weeks between the Fed's May and June meetings. The potential outcomes -- particularly in the case of a populist victory in the French election -- could rewrite the region's political and economic landscape and plunge the continent into an uncertain future.

Back in early 2016, Fed officials made no secret that they felt global economic and financial upheavals could threaten the U.S. economy, and officials remain alert to risks emanating from overseas.

Write to Harriet Torry at harriet.torry@wsj.com

(END) Dow Jones Newswires

May 02, 2017 13:31 ET (17:31 GMT)