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 The Fed's first two-day policy meeting of the year concludes on
Wednesday, and policymakers will likely restate their "patient"
approach to raising rates, while also voicing faith that the economy
will continue improving.
Fed Chair Janet Yellen faces growing skepticism that the central
bank can tighten monetary policy by mid-year, with a strengthening
dollar and falling oil prices adding to worries that inflation
readings remain too low for the Fed to begin hiking.
But U.S. central bank officials have argued that the drop in oil
prices is a transitory factor that benefits U.S. consumers in the
short run. And with unemployment dropping and growth on track, Fed
officials have indicated they will move forward with an initial rate
hike in the middle or latter half of the year even if other closely
watched measures such as wages remain weak.
"The Fed will follow through and normalize rates later this
year...Our thinking is June. I would not debate anybody who said
September," said Mark Zandi, chief economist for Moody's Analytics.
This week's Federal Open Market Committee meeting features four new
regional bank presidents who rotate into voting positions: Atlanta's
Dennis Lockhart, Chicago's Charles Evans, Richmond's Jeffrey Lacker
and San Francisco's John Williams. With the exception of Lacker, an
inflation hawk, the rest of that bloc are largely dovish central
bankers who have favored keeping rates low throughout the economic
recovery.
MARKET TURMOIL
The Fed's policy statement on Wednesday will follow a tumultuous few
weeks in markets worldwide. In that time, the divergence between the
U.S. and other major central banks has become stark, with a host of
countries cutting interest rates and the European Central Bank
launching a massive new stimulus program.
The collapse in global oil prices is already helping to push the Fed
further from achieving a key policy goal of raising annual inflation
to two percent. Lower energy prices and the ECB's stimulus also adds
further upward pressure on the dollar.
"The dollar, as a standalone, is unlikely to feature materially in
the Fed's decision. But the Fed will consider the extent to which
international weakness and geo-political issues counter better
economic conditions," said Mohamed El-Erian, chief economic adviser
at Allianz.
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Morgan Stanley moved its Fed liftoff forecast to March 2016 from
January, and lowered its 2015 core PCE growth forecast - a key Fed
inflationary measure - to 1.2 percent from 1.9 percent.
U.S. economic data meanwhile has been mixed and futures contracts
show investors betting on a greater chance of the Fed moving up
rates in September or later, rather than June.
But in the Fed's December statement, its addition of the word
"patient" in reference to rate guidance showed the central bank was
still inching closer to lift off. Yellen went further at the
December press conference to say the Fed was unlikely to begin the
process for at least the "next couple of meetings."
That statement all but ruled out a move in January and March, with
investors now watching for when 'patient' is dropped, which will
likely signal the Fed is ready to move at the next meeting. While
Yellen has said a rate decision depends on the data, the June
meeting and its scheduled press conference appears to be the central
bank's target.
"The Fed is operating under the base case of a June liftoff, and
June is still several months away," said Cornerstone Macro economist
Robert Perli, who added he expects, at most, minor changes to the
Fed's December statement. "The Fed can afford to buy itself some
more time, and that's exactly what we expect it to do."
(Additional reporting by Jennifer Ablan in New York; Editing by
Chizu Nomiyama)
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