“UNCERTAINTY”
Ryan Sweet, chief US economist at Oxford Economics, said that “given the incoming data on inflation, risks are weighted toward fewer cuts this year”.
Sweet anticipates two reductions, in September and December.
The Fed’s dependence on incoming data also raises “uncertainty in the forecast for the path of monetary policy,” Sweet added in a recent note.
When Fed Chair Jerome Powell holds a press conference after the two-day meeting, analysts will be scrutinising his comments on progress in lowering inflation – looking for signals that the first cut has been nudged to September.
Another issue is Powell’s response on whether the Fed might look into raising rates again, although observers expect the bar would be set very high for such a move.
BALANCE SHEET
Economists also think the Fed could provide clarity this week on a policy allowing assets it purchased to help the US economy weather the pandemic to “run off”, or expire without being replaced.
The bank allows up to US$95 billion in assets to mature each month without being replaced.
It currently holds about US$7.4 trillion in assets, and is debating when to start slowing the current pace of runoff.
The ongoing measure reduces the overall size of the Fed’s balance sheet and is also meant to tighten monetary policy.
Powell recently said it will likely be appropriate to slow the pace of runoff “fairly soon”.
He added that this would reduce the risk of “liquidity problems” – a likely reference to last year’s banking crisis.
Analysts broadly expect an announcement on runoff to come this week or at the next interest rate meeting in June.
