The spotlight is on the Fed today, with market participants expecting today’s Fed statement, economic projections and Chairwoman Janet Yellen’s press conference to provide clarity for interest rate policy going forward. With so much riding on what the Fed says and how investors interpret the central bank’s message, there is plenty of room for miscommunication that could add to uncertainty.
The market’s fixation on the word ‘patient’ notwithstanding, it will be even more important to keep an eye on the committee members’ projections and Yellen’s press event. Lowered GDP and inflation projections would be an acknowledgement of the recent dollar strength and would be a clearer dovish signal than any verbiage in the statement. At the time of the December meeting, the committee had projected inflation to be between 1% to 1.6% this year and 1.7% to 2% next year. With respect to GDP growth, the committee projected the U.S. economy to be bound by a 3% growth pace at the top end for both this year and next, with the low end of the growth band at 2.6% this year and 2.5% next year.
[Must Read: Reality Check: GDP Tanking]
Lowered projections for GDP and inflation will represent a delayed rate hike even if ‘patient’ drops out from the post-meeting statement. While the June meeting has emerged as the consensus period for when the FOMC will start raising rates, recent market action in response to less than solid economic data indicates that investors still appear open to a later liftoff date. It is this “bad news is good news” mindset that provides the most rational explanation for the stronger market sessions in recent days following softer economic readings. I suspect that a downgrade to the committee’s growth and inflation projections will likely get interpreted in a similar way.
With respect to earnings, the 2015 Q1 earnings season got underway with the mixed reports from Oracle (ORCL) and Adobe (ADBE) after the close on Tuesday. The FedEx (FDX) report this morning didn’t help matters much either, with the delivery bellwether beating estimates for the February quarter, but providing lower guidance relative to current consensus estimates.
