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Here’s A Quick Guide To The May Fed Statement (Because I Know You Care)

What's the frequency Jay?

Ok, here comes the Fed statement, who’s excited?

Clearly, the focus will be on the inflation language considering we’re now on target:

PCE

And considering other signs point to mounting wage pressures:

ECI

Markets are also keenly aware that surging crude prices could lift inflation expectations and given the dollar’s recent recoupling with 10Y yields and rate diffs, the stage is set for something of a self-feeding loop, where yields and the dollar reinforce one another and fears that late-cycle fiscal stimulus will push up inflation prompt the Fed to stick to the proverbial script thus further underpinning the resurgent greenback.

We talked a good deal about the Fed over the weekend in “Why Goldman Thinks The Fed Isn’t Even Halfway There“, but as far as a quick read on the May meeting goes, here are three things to watch for from Goldman:

  1. Moderating the activity language. We expect the statement will recognize the softer March jobs report by amending the description of strong job gains in recent months with the “on average” qualifier. We also expect the sentence “the economic outlook has strengthened in recent months” to be dropped because the Fed’s outlook has probably not changed materially since the March meeting. Alternatively, they may send a more positive message by for instance indicating that “the economic outlook remains strong”.
  2. Upgrade of the inflation description. We expect the characterization of headline and core inflation on a 12-month basis to be upgraded from “have continued to run below 2%” to “has increased in recent quarters, near the Committee’s 2 percent longer-run objective.” With the rise in 10-year breakeven inflation rates to 2.18%, we also expect the description of market-based measures of inflation compensation to be upgraded from “low” to “somewhat low”.
  3. No changes to the balance of risks and the policy stance. The characterization of risks to the outlook as “roughly balanced” is likely to remain in place, partially reflecting inertia and potential concerns about trade policy. The characterization of the stance of current policy as “accommodative” is also unlikely to be dropped next week as the Fed is extremely likely to keep the policy rate unchanged.

BNP reminds you that “growth is still above trend and with this likely to be the weakest quarter of the year, the Committee is on track to deliver three more rate hikes this year.”

Obviously, the “important” meeting comes in June, but all the same, the preponderance of data and the market’s increasingly desperate efforts to get a read on Jerome Powell will make the statement perhaps more parse-worthy (if you will) than would otherwise be the case.

“Inflation is where investors will focus as the Fed takes a breather from hiking rates”, Morgan Stanley writes, adding that the committee “will mention that inflation readings on a 12-month basis have risen, along with market-based measures of expectations.”

The FOMC “might use statement to hint at stepped-up pace of tightening for rest of year, even if there are no policy changes at this meeting,” Capital Economics muses, on the way to predicting that “inflation will prompt faster tightening in 2018, with rising core measures seen as concerning to some officials.”

“Policy makers should acknowledge that while inflation remains below 2% target, it’s progressing toward objective; they’ll also reaffirm that the labor market and economic activity continue to expand at a moderate pace,” BofAML said in a recent piece.

“The interesting statement revisions will come in their re-write of the inflation language,” JPMorgan notes, reiterating everything said above, before noting that “incoming data will necessitate a change in wording to say that inflation is effectively at target, and an updated outlook to say FOMC expects inflation to continue to stabilize around 2%.”

Not everyone agreed entirely headed in. “Dollar bulls are likely expecting the Fed to tweak language around inflation, but the statement might instead be tweaked in a way to make markets not bet too aggressively on further tightening,” Credit Agricole’s Valentin Marinov told Bloomberg TV.

This of course comes ahead of Friday’s jobs report, which will be watched perhaps more closely than usual given last month’s rather egregious miss and given the notion that the “synchronous global growth” narrative is gradually morphing into a “how long can fiscal stimulus prolong the second-longest expansion in U.S. history while the rest of the world decelerates” meme.

All of this should be seen in the context of the ongoing discussion of the Powell “put” which everyone is still trying to divine. For more on that, you might be interested in checking out these:

Oh, and remember, Powell has a plan – the only question is whether it’s a good one.

In the end, I guess we shouldn’t worry, because if the Powell “put” never materializes, we can always count on the ol’ Erdogan “put”:

put

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