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April FOMC


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April FOMC

Robert Eisenbeis is CumberlandAdvisors' vice chairman and chief monetary economist. Prior to joining Cumberland,he was executive vice president and director of research at the Federal ReserveBank of Atlanta. He is a member of the U.S. Shadow Financial Regulatory Committeeand the Financial Economist Roundtable. The views and opinions expressed in thispiece represent only those of the author and are not necessarily those of S&PGlobal Market Intelligence.

As widelyexpected, the FederalOpen Market Committee left rates unchangedat its April meeting. The one takeaway from the committee's statement was removalof the reference to international concerns as a source of downside risk. But don'tmake too much of this omission, since international developments are mentioned lateron in the statement, where the committee lists an array of factors it will considerin order to "determine the timing and size of future adjustments to the targetrange for the federal funds rate."

Now thatthe April meeting is on the books, attention is already turning to the possibilityof a move in June. As we wrotefollowing the FOMC's December 2015 meeting, June is the earliest meeting when theinitial rate adjustment of 2016 could be likely to occur. There were several reasonsfor that conclusion in December. First, it appeared from the dot chart that therewas a solid core of voting members who appeared to favor only two moves in 2016.(This was confirmed more recently in the March Summary of Economic Projections.)Second, with inflation languishing below target, inflation expectations stable ordrifting slightly to the downside, and only one reading on personal consumptionexpenditures (in February — the March number won't be available until after theApril meeting), it was unlikely that there would be evidence of a significant accelerationin inflation to suggest that the committee was behind the curve. Third, the committeehad only a stale reading on fourth-quarter 2015 GDP and will have no reading onfirst-quarter 2016 GDP upon which to act until its June meeting, when the secondestimate will be available. All of this analysis suggesting there would be no policymove until June at the earliest has proved accurate.

Now,what about June? Readings on inflation continue to be below target and show no signsof acceleration. The labor market continues to improve, and the ratio of new claimsto the size of the labor force is less than half of what it was in the fall of 2007,when the absolute number of new claims was about where it is now. Thus a key inputto the June decision will be whether the real economy is accelerating in the secondquarter at a pace that is equal to or exceeds what the FOMC has projected.

The readingson the first quarter of 2016 don't afford much hope that real GDP is acceleratingat or above trend. For example, corporate earnings for the first quarter have beenquite disappointing. Other key indicators all failed to meet expectations, includinghousing starts, permits, new home sales, retail sales, industrial production, durablegoods orders and consumer confidence. Indeed, Thursday's release of the first readingon first-quarter GDP at 0.5% confirmed that growth was subpar. The numbers suggestthat while June may now be a live meeting, the probability of a move is far fromcertain and may be only 50-50. Perhaps new data will change things, but the firstquarter is not likely to have generated the kind of momentum necessary to emboldena risk-averse FOMC to move again.