Factory Growth Slows, Will We Still See A Rate Hike?

Traders apparently took Wednesday's policy announcement to mean that the central bank was still firmly on course to hike rates again next month, pushing the market implied odds of a 25 basis point interest rate hike from the Fed at its 14 June meeting to 94% from roughly 70.7% beforehand. The Fed jolted investors when it released the minutes of its March meeting, which showed that most officials thought that process would be appropriate later this year.

The realisation that rates look very likely to rise next month saw a modest end to trading on Wall Street this morning.

All eyes now shift to the government's April jobs report that is scheduled to be announced Friday. The 12-month measure for the PCE price index slowed to 1.8 percent, below the Fed's two percent target and down from 2.1 percent in February, which had been a five-year record.

The U.S. economy grew a meager 0.7% at an annual rate in the first quarter.

Similarly, March's feeble payroll growth has been traced to cold and stormy weather in some parts of the country and an expected decline after warm weather pulled forward hiring to the first two months a year.

While progress on the inflation front has been uneven, economists increasingly believe the central bank has neared its congressional mandate to seek full employment, meaning the economy provides as many jobs as possible without triggering inflation. The unemployment rate also fell in March to near a 10-year low. The Fed's policy statement Wednesday characterized recent average monthly job growth as "solid".

Since the last meeting economic data has been mixed.

More resilient global growth is a big reason for the more balanced outlook.

"If the Fed really is to hike in June, and market pricing suggests it is, we can expect various Fed officials to get wheeled out over the coming weeks to start talking up the prospect in order to smooth the path for the hike", Wilson added.

One reason the Fed didn't say more about its expectations for its balance sheet might have been that this week's meeting wasn't accompanied by a news conference with Chair Janet Yellen to explain any shifts in the Fed's policy or thinking. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.

The spread is approaching its flattest close since President Donald Trump's election night win.

The Fed's dual message was that while now isn't the time to resume raising rates, the economy remains durable enough to withstand further increases soon. Congress has found itself preoccupied for much of the year with unsuccessful efforts to repeal the Affordable Care Act, or Obamacare.

  • Zachary Reyes