The Federal Reserve opened Tuesday its first policy meeting since a historic rate rise last month with weak inflation and global market turbulence clouding its plans.
Days after the European Central Bank signaled it could expand stimulus measures if inflation slows further, Fed policymakers will weigh whether the confidence in the US economy that underpinned their first rate increase in more than nine years in December holds up.
While no policy action is expected at the end of the two-day Federal Open Market Committee meeting, the policymakers could give a hint as to whether their expectations for inflation, a key focus of interest rate policy, have changed given the continued fall in oil prices.
Significantly, since the December meeting several Fed officials have made clear they view deflationary pressures as a significant risk despite other signs, like job creation, that point to firm economic growth.
Oil prices are 15 percent lower than at the last FOMC meeting, and although Fed officials have said they expect the impact of weak crude prices to be transitory, there is still no clear bottom for the market.
The oil price crash has meanwhile catalyzed a sell-off in equity markets around the world and this bearish trend has also likely caught the attention of FOMC members, analysts say.
So eyes will be on how the FOMC’s policy statement, to come at the end of the meeting on Wednesday, assesses the risks that prices broadly could continue to fall.
“With (Other OTC: WWTH – news) global equity markets down substantially over the last several weeks, the US dollar reaching new cyclical highs, and a clouded inflation outlook, the FOMC statement should strike a more cautious tone,” Deutsche Bank US economist Joseph LaVorgna wrote in a client note.
The December move lifted the benchmark federal funds rate off the zero level to an 0.25-0.50 percent level, which is still extraordinarily low.
At the time the FOMC’s forecast implied three or four more increases through this year, to end at around 1.25 percent.
But if inflation remains as weak as it appears, rates could rise much more slowly.
US jobs growth was solid in December and unemployment held at a seven-year low of 5.0 percent.
But consumer prices fell last month overall, and core prices, stripping out food and fuel, rose only 0.1 percent. The Fed has kept monetary policy very loose as it aims to push inflation up to around 2.0 percent. So far, that target remains elusive.
Chris Low of FTN Financial said the Fed would preserve the option of another rate increase in March.
But, he added, it could offer “some acknowledgement the FOMC might delay tightening if financial markets continue to sell off.”
LaVorgna, though, said they would wait for more data to assess the overall trend. “It (Other OTC: ITGL – news) is too early for Fed officials to signal greater concern about the growth outlook,” he said.
