- FOMC statement will likely signal more uncertainty
- The statement will retain its implicit bias toward tightening, but probably slightly less than the previous
The statement will likely signal more concern on the downside risks to growth, along with continued concern about inflation
Paragraph on growth: we think that the paragraph could be modified to allow for weaker data and increased downside risks to economic growth. In particular, the wording will probably add a reference to a major area of concern: the weakness in business investment that heightens uncertainty to the economic outlook. Thus, the line on “recent indicators have been mixed and the adjustment in the housing sector is ongoing” will probably be replaced by a somewhat weaker characterization –considering that economic data has come on balance on the soft side– that will likely add a reference to the recent weakness in business investment.
Paragraph on inflation: the first part of the paragraph on inflation that stated “recent readings on core inflation have been somewhat elevated” could change to reflect the improvement on readings on core inflation in March. Besides, after averaging to smooth monthly volatility, core inflation has eased in recent months, consistent with Fed’s outlook of a gradual decrease in underlying inflation. Thus, the tone of the paragraph will probably be left practically unchanged: “although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.” Although the trend in core inflation could have eased concerns –which is implicitly reflected in recent speeches–, with still tight labor markets they will likely continue to explicitly state their concern on inflation to reflect that they remain focused on whether it will decline gradually or remain persistently above their comfort zone.
Paragraph on monetary policy: after the significant changes made to the previous statement –which recognized more explicitly than before that the next interest rate change might not be an increase– we think that the paragraph could be left close to intact. It will retain that the “predominant policy concern remains the risk that inflation will fail to moderate as expected”, but there is a slight chance of a mild rebalance of risks to allow for heightened downside risks to growth. If that proves to be the case, the statement will still remain biased toward tightening, but less than the previous. In other words, the statement will not be “neutral”, but closer. Summing up, the FOMC statement will likely signal more worries about economic growth along with continued concern on inflation.
