Fed meets on interest rates but markets eye June decision

Markets were already focusing more on what might happen in June as the Federal Reserve opened its two-day monetary policy meeting Tuesday with no expectations of an interest rate change.

With Chair Janet Yellen having tilted the Federal Open Market Committee to the dovish side in its March review, and the US economy in a lull, analysts say the group has room to wait and see what happens in the coming months.

But some also say that with the global economy still facing significant risks, including the possibility that Britain will vote on June 23 to pull out of the European Union, the FOMC could hold off on increasing its benchmark fed funds rate until the second half of the year.

Markets were clearly not expecting any change in policy. The dollar, which weakened after the last Fed meeting in March, was relatively steady at $1.1311 per euro.

And the indication from CME fed fund futures prices was that markets do not expect the next rate hike before September at the earliest.

When the FOMC made its first rate increase in more than nine years in December, putting the short-term benchmark at a still ultra-low 0.25-0.50 percent, the expectation was for another 0.25 percentage point rise each quarter over 2016.

But so far this year, noted economist Chris Low at FTN Financial, what is notable about the FOMC is “the lack of urgency by Yellen and Co.”

Although one key determinant of policy, employment levels, has improved strongly each month, with the unemployment rate now at 4.9 percent, the other main indicator, inflation, remains very weak.

On top of that, the turmoil in global markets in the first quarter and slower global growth overall has kept the Fed on the dovish side, even if a split among the FOMC members became evident in the last meeting.

Analysts expect the US economy grew at a pace of only 0.9 percent in the first quarter, down from 1.4 percent at the end of 2015.

Data released Tuesday showed the US industrial sector still weak, with durable goods orders up just 1.4 percent year-on-year in the first quarter, and consumer confidence slightly lower.

So most eyes will be on how the FOMC characterizes US growth in its policy statement at the close of the meeting on Wednesday. Yellen will not be giving a press conference separately after the meeting.

“The tone is likely to be a bit more positive than in the March statement, consistent with another tightening move in June if data and market developments are supportive,” said Jim O’Sullivan of High Frequency Economics.

“That said, we don’t expect any direct hint about potential tightening by then.”