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 The Fed has held its overnight lending rate for banks at a target
range of between 0.25 and 0.50 percent since it lifted the benchmark
interest rate for the first time in a decade from near zero last
December.
Since then the Fed has signaled more caution, despite the U.S.
economy's relative strength, as concerns a slowing China would
depress global growth sparked steep stock price declines and tighter
financial market conditions early in the year.
The latest Fed policy decision statement is due to be released at 2
p.m. EDT on Wednesday. Fed Chair Janet Yellen is not scheduled to
hold a press conference.
Markets have turned up since the last rate decision in March. The
S&P 500 [.SPX] has risen more than 14 percent since mid-February.
China's economy has also shown more positive signs, growing at a 6.7
percent pace in the first quarter.
A Reuters poll of more than 80 economists showed expectations were
for two rate increases this year, with the possibility the Fed will
hike in June.
Additionally, some of the pressures that have kept inflation lower
than the Fed would like have abated. Oil prices have rallied, with
the Brent benchmark crude [LC0c1] up 20 percent to around $44 a
barrel since the Fed's December rate hike, while the dollar has
dropped around 4 percent against a basket of currencies during the
same period.
Those factors may allow the Fed to reinstate a balance of risks
assessment in its statement, most likely a description of the risks
to the U.S. economic outlook as "nearly balanced."
Such phrasing is usually seen as prerequisite to policymakers even
considering another rate rise. However, the U.S. central bank has
tried to move away from forward guidance as it implements rate
hikes.
The Fed may also acknowledge the recent improved market indicators
by dropping or softening its March warning that global economic and
financial developments "continue to pose risks."
"If anything, Fed officials will likely want to encourage markets to
price in more tightening than is being priced in currently," said
Jim O'Sullivan, an economist at High Frequency Economics, in a note.
Investors currently see zero chance the Fed will raise rates at this
week's meeting and see a 23 percent probability of a hike in June,
according to an analysis of Fed Fund futures by the CME Group.
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EYE ON THE DATA
The Fed may be wary of making too strong a judgment on the
resilience of the U.S. economy come June until it has more data.
The global situation has already caused the Fed rate setters to dial
back their estimates on the number of rate rises this year.
Predictions from policymakers now show two, compared to four last
December.
Other major central banks are grappling with ways to deal with
lackluster growth. The Fed remains concerned that with interest
rates still close to zero it would have to rely on more
unconventional policy tools should the economy slow.
Last week the European Central Bank kept its main refinancing rate
at zero and its bank overnight deposit rate in negative territory.
The Bank of Japan could cut its rates further into negative
territory when it meets on Thursday.
U.S. data in the pipeline includes the initial estimate of
first-quarter gross domestic product growth on Thursday, which is
expected to be weak. Economists polled by Reuters predict 0.7
percent growth for the first quarter. The Fed will look for signs
over the next few weeks that the economy is accelerating for the
second quarter.
Another strong monthly jobs report in just over a week's time could
assuage concerns as would evidence a recent uptick in inflation is
being maintained.
As such if there isn't a balance of risks reinserted into April's
statement, "Fed officials could still use their speeches to manage
market expectations higher," if they decide on June, said Sam
Bullard, an economist at Wells Fargo.
(Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)
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