Fed to remain on hold with few changes to the wording - Natixis

Thomas Julien, Research Analyst at Natixis, explains that they expect the Fed to remain on hold at its May 2-3 FOMC meeting with few changes to the wording and no signal for the short term conduct of monetary policy.

Key Quotes

“There will be no press conference and no update of the summary of economic projections.”

“Without much surprise, the Fed should remain on hold at its May 2-3 FOMC meeting. The target range of the fed funds rate will remain unchanged at ¾-1%. Only the statement will be released. It should undergo minor changes without any signal for the conduct of monetary policy in the short run. Therefore, the Fed shouldn’t’ close the door for a move in June without signaling its intention to hike neither. In line with our view, the market is not anticipating a move at this month’s meeting and expects the next hike in June.”

“Compared to the March meeting, the wording should be revised slightly in order to reflect recent developments in the US economy.  The central bank should acknowledge that growth slowed down in Q1 but is likely to attribute the deceleration to temporary factors. Household spending will thus be described in less favorable terms but comments on business fixed investment will be more positive. The first paragraph should continue to point to a strengthening of the labor market as even though the pace of job gains deteriorated, the unemployment rate decreased below the Fed’s estimate of the long-term level.”

“As for inflation, since the core PCE deflator decreased from 1.8% to 1.6% in March, slightly below the level that prevailed when the Fed met in March, the statement should continue to say that core inflation has “continued to run somewhat below 2%”.  We do not expect any changes on the description of inflation expectations.”

“The Fed will continue to describe near term risks as “roughly balanced”.”

“We will also watch out for any changes of the wording on the reinvestment policy. It might be too early for the Fed to edit the statement, but given the abundant discussions on the topic, we cannot entirely rule out this possibility.”

“No one should dissent from the decision.”