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FederalOpen Market Committee members are unlikely to shock markets by lifting interestrates during their meeting, but they may hint at a possible rate hike in Juneas markets have increasingly reduced projections for rate changes in 2016.
Centralbank policymakers have so far been mostly frustrated in their attempts to beginpolicy normalization: though they lifted interest rates for the first time inmore than a decade in December, concerns about the global economy, and marketturmoil, have forced Federal Reserve policymakers to delay taking their keytargeted fed funds rate higher.
Manyin markets are currently betting that slow growth and a number of other factorswill delay central bank policymakers further. Fed futures markets are currentlyprojecting that the Fed will not lift rates until the second half of the year,and perhaps only once before the end of 2016. GDP data later this week that isexpected to show lackluster first-quarter growth will likely fuel moreskepticism that Fed policymakers will hike rates anytime soon. Policymakersjustified their December rate hike by arguing that policy is in part determinedby their outlook, but seeing growth of less than 1% will certainly give boththem and investors pause.
It also makes it harder for Fed officials to argue that theU.S. domestic economy will not avoid the fallout of a slowdown in growth acrossthe developed world. Indeed, the aggressive stimulus actions of the Bank ofJapan and ECB this year have underscored how dramatically out of step Fedpolicymakers are with their counterparts around the world who are desperate tospur growth and inflation.
Even accounting for these developments, though, it remainspossible that the Fed could issue a more hawkish statement than many observersseem to expect. Some inflation readings have been inching higher toward theFOMC's long-run 2% target even as energy prices tumble. The GDP number willdisappoint, but the U.S. economy has recorded poor first quarters several timessince the financial crisis only to bounce back with stronger readings later inthe year.
Additionally, policymakers have yet to signal that they haveshifted their outlook since their last meeting.
And that outlook, at least publicly, is far from wheremarkets are pricing currently. The minutes of that last meeting made it clearthat policymakers had diverse views about whether a rate hike would bejustified during April, though ultimately that seemed to signal aninappropriate "sense of urgency" for most policymakers. The minutesalso hinted that there is a bloc of FOMC voters and other officials who believethe Fed should already be further along the normalization path.
What investors will be looking for then, in the Aprilstatement, is whether those policymakers may have reached the point where itwill take signs of deflation pressure or recession before they vote in favor ofkeeping rates parked at their current level. If that is the case, then marketsmay have to quickly readjust their positions on the bank's June meeting.