What to watch for at Fed meeting
Here are three things to know about Wednesday’s meeting of the Federal Open Market Committee, the Federal Reserve’s policy-making body.
1. June preview: Fed officials are likely to set the stage for a possible interest rate hike at their June meeting. They mainly will be motivated by three factors: a further strengthening in labor market conditions that also improves the outlook for wage growth; the recent significant easing in financial conditions, including easier access to borrowing for corporate and mortgage financing; and the central bank’s eagerness to continue the process of monetary-policy normalization.
Nonetheless, the Fed will not close off any options now. Officials will make clear that their decisions, including whether to raise rates in June, remain “data dependent.” As a result, they will signal that a June hike is not a certainty, but has evolved only from less likely to more likely.
2. Global events: Such a conditional policy on the part of the Fed depends less on the domestic context than on events in the rest of the world — such as economic slowing, as well as otheruncertainties, including the U.K. referendum on exiting from the European Union set for June 23.
But high international uncertainty and some excessive valuations mean the Fed is reluctant to surprise markets — especially with memories of the market disruptions in January and early February still fresh.
3. Made in Japan: Although the Fed will draw the attention of market participants, the most interesting event this week may be the Bank of Japan’s meeting on Thursday. That central bank faces an extremely tricky policy decision, amplified by downward pressures on inflationary expectations and the recent appreciation of the currency. Both accentuate the threat of a deepening deflationary trap.
The BOJ seems to be the monetary institution that has moved closest to the danger point where its policy intervention is not just becoming ineffective but even counter-productive. Its actions will be closely watched by others, particularly the European Central Bank, whose officials are correctly concerned about heading down a similar road.