Loading ...Investors don’t expect softer economic data to deter the Fed and they aren’t hopeful for new detail on plans for shrinking balance sheet.
Even though inflation has been softer and other economic data on the weak side, the minutes of the Federal Reserve’s last meeting, to be released at 2 p.m. ET on Wednesday, are expected to point to another rate hike in June.
Investors will be watching to see how the Federal Open Market Committee balances the slightly weaker data with the push to raise rates. They will also be looking for any new information about the Fed’s plans to shrink its balance sheet.
John Bellows, portfolio manager with Western Asset, expects the Fed to stay on track:
After a little shakiness last week, market pricing now reflects an expectation of another increase in June and an expectation of continued, gradual hikes afterwards. In our view, there is no reason for the Fed to change this set of expectations in [the] minutes. Against the generally positive tone in the growth data, the recent inflation data has been disappointing. The absence of sustained acceleration in wage gains is notable, and at a minimum casts a shade of down on the prospect for future gains in inflation.
But he doesn’t expect to hear much on balance sheet policy:
While there is little doubt that the Fed views shrinking its balance sheet as part of the normalization process, the conversation is still preliminary and there is no particular need for them to commit at this stage. Whatever they end up doing, it is likely to be with the same emphasis on “gradual” and “careful” that has characterized all of their actions recently.
Here’s how Michael Sheldon, chief investment officer at RDM Financial Group, sees it playing out:
The Federal Reserve Bank is likely to emphasize that overall, the economy remains on pretty solid footing. On the positive side, they will likely highlight continued improvement in the labor markets, solid consumer confidence data, mostly positive data on housing along with some signs of improvement in the manufacturing sector.
Offsetting the positives, the FOMC may point to continued uncertainty in Washington, recent declines in inflation breakeven data and modest gains in wages.
Sheldon notes that anything that veers from this forecast could upset markets:
The markets expect the Fed to raise rates again in June and possibly later this year for a third time in 2017. Any signs that the Fed is backing away from this timetable could impact the dollar, bond market and help send stock prices higher.