Morgan Stanley recently released a report discussing the minutes from the April 28-29 Federal Reserve Open Market Committee (FOMC) meeting titled, “FOMC: Resolve Stirred, Not Shaken” written by Ellen Zentner, chief U.S. economist at Morgan Stanley. The company reported that despite the weak economic data that has been presented this year, the Fed still intends to raise interest rates. However, the committee is unsure as to which meeting the rate increase will be enacted.
“Policymakers by and large have not shied away from the intent to hike rates this year, though they have become less certain about which meeting it will occur,” Zentner reported.
The committee did not anticipate weak economic growth for the first half of the year, the report says. They reviewed factors such as weather, port disruptions, energy capex cuts, dollar effects on exports, and seasonal measurement bias and came to the conclusion that these afflictions are temporary and “economic growth would return to a moderate pace over the rest of this year.”
“With the exception of housing, the data have continued to disappoint mid-way through Q2, but nascent signs of stronger wage growth and an easing of US dollar headwinds give some comfort on the outlook for the second half of the year,” Zentner said in the report.
Zentner reported that a June rate increase is no longer likely and the increase is expected to occur at the December FOMC meeting, followed by a pause as policymakers assess its effect on financial conditions.
“Many participants . . . thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied,” the Fed said in their April meeting.
Looking ahead, Zentner notes that the key data they will watch are indicators of consumer sentiment and spending. The Fed indicted in their meeting that these indicators are not manifesting through the consumer.
“The expected boost to household spending from lower energy prices had apparently so far not materialized, highlighting the possibility of less underlying momentum in consumer expenditures than participants had previously judged,” the Fed said. “Some participants expressed particular concern about this prospect, as their expectations of a moderate expansion of economic activity in the medium term, combined with further improvements in labor market conditions, rested largely on a scenario in which consumer spending grows robustly despite softness in other components of aggregate demand.”
A disappointing first quarter raised questions as to whether seasonal bias tendencies are to blame for poor economic numbers, Morgan Stanley reports.
“Seasonal adjustment moves growth around within a year, but it doesn’t have any net impact over the full course of a year–seasonal factors are a zero sum game, robbing from one quarter simply adds to another,” Zentner wrote. “If the adjustment takes too much growth out of Q1, then it has to add too much back to the rest of the year.
Zentner came to the conclusion that the economy will need to see a vast improvement for the second quarter in order to prevent or further delay the rise in interest rates. This may explain why policymakers have noted the possibility of seasonal bias in the growth numbers, but are hesitant to reject the slow start to the year altogether.
FOMC Chair Janet L. Yellen is expected to speak on the U.S. economic outlook this Friday, conveying either a sense of calm or one of caution, Zentner notes. There will be no Q&A following her prepared remarks.