FOMC Preview: No change in short-term interest rate policy - Nomura

The research team at Nomura expects no change in short-term interest rate policy at the 2-3 May FOMC meeting.

Key Quotes

“Recent Fedspeak indicates most members expect two more rate hikes later in 2017. While short-term interest rate policy will most likely remain unchanged at the upcoming meeting, markets will pay significant attention to the language of the FOMC statement at the end of the two-day meeting. Attention has shifted towards the Fed’s balance sheet policy in recent months with multiple speeches by Fed officials stressing the need for a well-communicated, smooth winding down. While there seems to be consensus among committee members regarding the timing of balance sheet adjustment, many questions remain regarding the specifics of the process.”

“We find it most likely that there will be no significant change in language as it relates to the balance sheet – not much has changed since the most recent FOMC meeting. However, there is some possibility that the committee will attempt to provide more clarity regarding specifics of the long-term trajectory of the adjustment process.”

“Additionally, the language of the first two paragraphs of the post-meeting statement, as they relate to recent economic developments and expectations, will be under scrutiny as they may give additional clues on the committee’s intentions for the next rate hike. Given the data-dependency of monetary policy, it is important for the FOMC to describe the economic status in a way that it can manage market expectations.”

“Spending data over Q1 remained soft since the last FOMC meeting. For example, domestic light vehicle sales in Q1 slowed to an average pace of 13.4m saar from Q4 average of 14.1m.  Sales in April were weaker than expected, coming in at 13.1m saar. Moreover, the weakness in Q1 GDP growth estimate from the BEA last week, which slowed to a 0.7% q-o-q saar increase from a 2.1% gain in Q4, require some comment. This development, combined with a downside surprise in the March employment report, core CPI, and core PCE inflation, presents FOMC officials with some challenge in terms of how to assess the overall health of the economy.”