Edited by Vani Rao
Fed expected to lower asset purchases to $15 billion from July 1
Investors are awaiting key announcements and forecasts following the Federal Open Market Committee’s (FOMC) two-day meeting starting June 17, 2014. The FOMC meeting announcements and forecasts will be followed by remarks from Federal Reserve chair, Janet Yellen, on Wednesday, June 18, 2014. All eyes will be on Janet Yellen, who will have to decide when the Fed will increase its interest rates above zero for the first time since 2009. Yellen is faced with her first challenge in a delicately balanced economy since increasing the interest rates too soon would hinder the economic recovery and harm wage growth for workers. On the other hand, raising the interest rates too late could trigger an inflationary trend.
The FOMC meeting will also focus on discussions to taper its asset purchase program by $10 billion to $35 billion. Starting July 1, 2014, the Fed is expected to lower its asset purchases to $15 billion in agency mortgage-backed securities and $20 billion in Treasuries. It is also expected to maintain its current forward guidance on the support for the federal funds rate.
Measures to tackle inflation and unemployment
The latest consumer price data shows that inflation is showing an uptick. On Tuesday, June 17, 2014, the US Bureau of Labor Statistics announced that the consumer price index had risen 2.1% in the past year. The FOMC meeting will discuss key measures to curtail inflation through some preliminary measures.
Data from the US Labor Department shows that the producer price index for final demand slipped 0.2% after advancing 0.6% in April. Producer prices fell in May after two months of gains, but the decline was not enough to change perceptions that inflation is steadily inching up.
What is more worrisome is that consumer sentiment slipped slightly in early June. The Thomson Reuters/University of Michigan’s consumer sentiment index was at 81.2 in June as compared to 81.9 in May.
Yellen will also looking to increase investor confidence through long-term measures that are aimed at shoring up employment data. According to the US Labor Department, non-farm payrolls increased 217,000 last month, in line with market expectations. Data for March and April was revised downwards to show 6,000 fewer jobs created than previously reported.
Given this dismal scenario, the FOMC will maintain its focus on the potential for a cyclical growth in the coming quarters, despite the slowdown seen in the first quarter. Despite the 1% drop in real GDP in the first quarter, key economic data now shows that the US economy is growing at a steady rate and slightly above expectations.
Forecasts for Q2
Most importantly, the FOMC is likely to make some changes to its economic outlook and its economic projections for Q2. While it is very obvious that the FOMC will need to reduce its 2014 real GDP growth forecast, taking into account the slowdown in Q1, investors could expect the committee to reduce its unemployment rate forecast and revise its inflation forecast.