Well Fargo (wed 29 Apr 2015)-FOMC: No New Signals on Rate Hike Timing

Well Fargo
FOMC: No New Signals on Rate Hike Timing
While acknowledging the weak first quarter performance, Fed officials maintained the current policy stance at the April FOMC meeting. Incoming Q2 data will take on greater importance to the timing of a Fed rate hike
Downbeat Q1 Assessment
As was widely expected, the Federal Open Market Committee (FOMC)
maintained its federal funds target rate range while keeping the forward
rate guidance language very similar to the March statement. The tone of the
Fed’s current economic assessment was clearly more cautious, mirroring
the disappointing Q1 GDP report received earlier in the day. The Fed’s
cautiousness was evident across the board, with more somber assessments
on the labor market, household spending, business fixed investment, the
housing market and exports compared to the March statement. The Fed
acknowledged that transitory factors, in part, slowed growth during the
winter months and, therefore, implies officials anticipate a rebound in
economic activity in the current quarter. On the price front, the Fed stated
inflation “continued to run below the Committee’s longer-run objective”
with lower energy prices and non-energy import prices cited as reasons for
the low run rate.
In regards to the paragraph on the monetary policy outlook, no significant
changes were made as officials still believe the U.S. economy is, on balance,
moving closer to the day where a rate hike will be considered. For that
consideration, the FOMC reaffirmed the need for further improvement in
the labor market and to be “reasonably confident” that inflation will move
back to its 2 percent longer-run target over the medium term.
Conviction of Outlook Still Key to Rate Hike Timing
At the March FOMC meeting, Fed officials appeared to have had significant
concern that inflation was too low. Since the March meeting, the modest
pickup in core consumer and producer inflation has likely alleviated some
of those concerns and turned attention back toward growth prospects. As
such, this morning’s weak Q1 GDP report may have increased concerns for
some Fed officials over the anticipated second quarter rebound and the
trend rate of growth over the medium-term forecast horizon.
Fed officials will want to see the next few months’ indicator performance to
better assess the underlying growth trend following the weak first quarter
and to gauge whether their outlook of firming GDP growth for the
remainder of this year and next remains intact. Shaking off the transitory
factors of winter weather and the port disruptions, we believe a moderate
rebound is in store for the second quarter as growth in consumer spending
and business fixed investment should pick back up. We doubt there is
enough time for the economy to rebound in a convincing enough way for
the Fed to move in June, but there is still plenty of runway left between now
and September. The critical question for the Fed now is how much of the
first quarter’s weakness was transitory and how much is longer lasting. This
puts more weight on upcoming data, which will soften or harden the Fed’s
resolve.