Fed offers little in way of guidance for future

RISING oil prices and a more stable Chinese economy allowed the Federal Reserve to shift its focus back to the home front on Wednesday, as it signalled that US jobs and inflation data would determine whether it hiked interest rates in June.

The US central bank gave scant hints of how it was leaning in the wake of its latest policy meeting, issuing a statement free of the forward-looking guidance it had used to massage expectations in markets and within the public.

A previous reference to global economic risks, generally seen as a red light for any rate hike, was dropped from the statement in what appeared to be an attempt to coax investors back onto a diet of US economic data. That is something Fed chairwoman Janet Yellen and other policymakers have been trying to do for months.

In a note issued after the Fed announced it had kept rates unchanged, Barclays analysts said the central bank now “desires maximum optionality” that would allow it to hike rates at its next meeting in June without having to strongly signal it would do so.

“The Fed was trying to walk a very fine line. They wanted to leave June open… But they don’t want it to be a 100 percent (certainty) either,” Don Ellenberger, a senior portfolio manager with Federated Investors in Pittsburgh, said.

The Fed’s focus moving ahead will be on employment, economic growth, and perhaps most importantly, whether inflation begins to show any evidence of increasing from its current low level to the central bank’s 2 percent target.

Since last year, Yellen has tried to push a “data-dependent” approach, in which investors and households develop their sense of Fed policy from the performance of the economy, rather than through central bank statements.

Investors currently put the chances of a June rate hike at just more than 20 percent, meaning the Fed may go more than half a year between its rate hike last December – the first in almost a decade – and the next one. That is a glacial pace.

“Whether the Fed ends up hiking in June depends on a continued gradual improvement in the labour market and wage expectations, together with relative economic and financial calm internationally,” Mohamed el-Erian, the chief economic adviser at Allianz, said.

The Fed on Wednesday also did not refer to the balance of risks that lay before the economy. That assessment, a staple of previous statements, has broadly signalled whether policymakers felt the economic landscape was likely to improve or worsen.

The Fed removed the reference earlier this year because policymakers felt the uncertainty surrounding China, oil prices and other global events had clouded their ability to make a definitive statement.

Its continued exclusion leaves markets even further wedded to the flow of data. Some Fed officials have suggested they would like to keep it that way.

San Francisco Fed president John Williams told reporters in March that while investors were looking for “powerful signs” of the way policy was headed, it was hard to communicate that succinctly.

Jon Faust, a former Fed adviser who is now an economics professor at Johns Hopkins University, agreed with Williams and described the balance of risks language as “woefully inadequate for characterising the situation”, and “subject to misinterpretation”.

“I hope it doesn’t come back,” Faust said. – Reuters