The Federal Reserve will keep its policy rate unchanged at its May 1 meeting this week. The committee will also likely update its statement to reflect recent economic data releases and reiterate a focus on inflation that continues to run below the central bank’s 2 percent target. We do not anticipate that the Fed will move to reshape its policy path or forward-looking communications following last week’s first quarter gross domestic product (GDP) estimate of 3.2 percent.
Policymakers will likely look past the top-line growth number, which includes the volatile trade and inventory categories, and focus instead on real final sales to domestic private purchasers, which better accounts for economic activity in the real economy, and which expanded at a tepid 1.3 percent pace.
Given that the market is pricing in a 50 percent probability of a rate cut later this year, one can be sure that Fed Chair Jerome Powell will face questions on the direction of the policy path in the press conference following the publication of the monetary policy statement. In both the statement and the subsequent press conference, Powell will likely seek to reinforce the central bank’s patient policy path.
Policymakers will likely look past the top-line growth number, which includes the volatile trade and inventory categories, and focus instead on real final sales to domestic private purchasers, which better accounts for economic activity in the real economy, and which expanded at a tepid 1.3 percent pace.
In our estimation, the focus at the Fed has shifted toward the real economy and the absence of inflation that has followed an extended period of unemployment below the Fed’s estimation of full employment. In the policy statement and press conference, we expect the central bank to place an emphasis on inflation expectations. Our favorite metric of inflation expectations, the U.S. five year, five year forward stands at 1.96 percent, which is relatively unchanged since the March meeting.
It appears increasingly likely that the Fed is preparing to update its policy regime later this year or early next. The minutes from this week’s meeting, which will be published on May 22, and the Fed Chicago Conference on June 4-5, are both likely to be far more instructive about a possible shift in the policy regime than the May 1 statement and press conference.
The statement probably won’t include a balance of risks assessment for the third straight time, while leaving in language noting the labor market remains strong and that inflation is near 2 percent. We expect the Fed to repeat its mantra of patience while removing language around global economic and financial developments. We do not anticipate any dissents.
