What To Expect From The Fed Next Week
Next Tuesday, when the
Federal Open Markets Committee meets in order to decide the future monetary
policy, it will likely keep rates accommodative at 1.25% while
readopting a neutral bias. Currently, the near month Fed Funds future contract
is pricing a 16% chance of a 25 basis point cut, which pretty much means that
the market isn’t expecting anything from the Fed. And the reasons behind the
market’s view about the Fed’s decisions are likely to be the following:
First, due to the fact that the war in Iraq was
still occurring when March’s data was measured, most of the latest economic
releases have been discounted. The Fed will therefore need to look at April’s
data, which will be released later this month, and will heavily scrutinize it to
find any clues about a more convincing post-war economic pickup.
Second, in April, there were a few developments
that are now providing some tailwinds for the economy, already providing
additional stimulus. Some of these developments include: lower energy prices,
which provide consumers and businesses with more leftover cash for spending; a
narrowing corporate bond spread, which provides cheaper financing for business
spending; higher consumer confidence, which should also prompt businesses to
spend as their expectations for increased final demand will increase; and higher
equity prices, due to increasing profit expectations.
Third, at the very least, $350 billion in tax
cuts are expected to make their way into the economy in the months ahead. And
depending on the specifics of the cut   (which should be more
apparent in the weeks ahead), the Fed will want to avoid easing monetary policy
further if fiscal stimulus will provide more fuel for the economy in the months
ahead.  Â
May will a big month for data, so watch closely.