Gotcha! You didn’t think it would be THAT easy did you?!? In any case, let’s turn the spotlight on this week’s main event: the FOMC rate decision. Will the Fed finally omit their favorite “extended period” phrase this time around?
In their previous rate statement last April, the Fed kept its benchmark rate at its current level even though they noted that the US economy is already seeing signs of improvement. Except for lone wolf Thomas Hoenig, the rest of the policymakers reasoned out that inflationary pressures are still subdued, providing grounds for keeping rates at their low levels for an “extended period.”
Looking at the recent figures suggests that the economic picture is more or less unchanged, which implies that the argument for an interest rate hike this year is pretty much close to nil at this point in time.
For one, inflation remains at very low levels. The Fed’s preferred measure of inflation, the core personal consumption expenditure index, has been treading the 0.0%-0.2% region for more than a year now, indicating that prices has yet to pick up. Meanwhile, the core consumer price index, which is another report used to gauge inflation, has reported two consecutive months of flat readings.
Secondly, as I’ve said in a recent blog post, the Fed is still scampering to keep mortgage rates low in the housing market. With the government’s $8,000 tax-credit program for first-time home buyers over, demand is expected to fall even further. Keeping rates low longer will help support the weak housing sector.
Thirdly, the most recent report on the US labor market posted some disappointing figures, with the outlook not looking too bright as census hiring will die down in coming months.
Fourthly, the retail sales report posted a surprise dip in May, signaling that it might be too early for the Fed to start tightening.
And finally, Fed has been firm in their commitment keeping rates accommodative for an “extended period” in time. Sheesh, I don’t think it can be any clearer than that!
Because of that, I think I might just bet my bottom-dollar that the Fed will most likely leave rates unchanged in their upcoming rate decision later this week.
I really don’t see why we should see any drastically different comments in the Fed’s statement. Traders will probably be expecting another round of comments saying that rates will be kept low for an “extended period.” I don’t think we’ll see traders shift their positions and we may be in for a pretty boring afternoon.
Then again, watch out if the Fed becomes extra cautious. If they drop some dovish comments, we may be in for another run to safety, which would benefit currencies like the dollar and the yen. If the last couple of months have told us anything, it’s that there is so much uncertainty in the markets. Should Fed officials express concern regarding the stability of the US economy, it may just cause traders to make some panic induced moves!