The Fed raised its policy interest rate last December for the first
time in a decade when market volatility finally subsided in the wake
of a scare over China's economy.
Similarly early this year markets wobbled on worries about a
slowdown in global economic growth and weak U.S. corporate earnings,
leading to expectations for further Fed rates rises to be revised
down, so Fed policymakers may be wary of this week sending too
strong a message of an imminent policy tightening.
Many Fed officials remain spooked by the steep stock market drop
earlier this year and by weak first-quarter U.S. economic data.
Concrete signs of higher inflation and growth may be needed before
the FOMC, the Fed's policy committee, continues with the projected
gradual path toward more normal levels of interest rates.
Though the U.S. economy is generating jobs and consumer prices have
risen, providing support for a Fed interest rate rise, weakness in
retail sales and international trade, as well as concern about
China's economy, are among reasons Fed Chair Janet Yellen will stay
cautious about further rate hikes before the second half of the
Markets have already anticipated such an approach, seeing no chance
of a rate increase at this week's meeting on April 26-27 of the
Federal Open Market Committee (FOMC), and are pricing in just a one
in five chance of a move at the next meeting on June 14-15. Reuters
polling of market participants sees two rate hikes this year.
"I don't think they can pull off a June hike without triggering
another round of volatility, and they don't want that because the
selloff in January and February left a deep scar," Aneta Markowska,
chief U.S. economist at Societe Generale, said in New York.
"The FOMC can't go too hawkish overnight because markets aren't
pricing in anything close to that."
Last week the European Central Bank held its policy rates at
historic lows and while the Fed is also set to stand pat for now,
its policymakers will not stay silent for too long as markets are
pricing in barely one rate hike this year, compared with the Fed's
view that two will probably be appropriate.
"NEXT MEETING" SEEN UNLIKELY
Last October, when stock markets had recovered from a sharp selloff
and as fears of a slowdown in China's economy were receding, the Fed
specifically cited the "next meeting" as possible for a policy move.
In December they followed through, raising rates for the first time
Fast forward to April this year and the Fed is experiencing deja vu.
After a volatile couple of months, stocks have rebounded and
financial conditions have eased as expectations for China's economy
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The S&P 500 index has recovered by some 15 percent in two months
while China's economy grew at 6.7 percent in the first quarter.
But this time, that's not enough. While Fed officials want to keep
the path clear to a rate rise in June, repeating their aggressive
pitch for a rate rise of last October will likely be a bridge too
far, given that a rise in inflation back to the Fed's 2.0-percent
target is seen unlikely.
The reading on first-quarter U.S. gross domestic product growth will
be published the day after the Fed meeting this week.
One way for the Fed to nudge skeptical traders into changing their
outlook without roiling markets would be to acknowledge the recent
improvement in financial conditions, including near-record U.S.
equity prices and a weaker U.S. dollar, by dropping or toning down
its warning in March that global economic and financial developments
"continue to pose risks."
The Fed could also rewrite its characterization of the uncertainty
surrounding its forecasts, signaling risks are more balanced.
Such a cautious gesture next week could pave the way for Yellen to
later use a speech to clearly signal the Fed's intentions for June.
Such a strategy could also win over Boston Fed President Eric
Rosengren, a voter this year on policy who is usually among the
"doves" but has given two recent speeches in which he took issue
with the market's "dour" expectations for rates.
The Fed's so-called "hawks" typically prefer higher rates while
"doves", like Yellen of late, are more cautious.
"We see the April statement as leading to a compromise outcome,"
wrote Barclays economist Michael Gapen in a note last week.
(Reporting by Ann Saphir and Jonathan Spicer; editing by Clive
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