US Fed to signal summer rate hike via clues in 'wording'

(MENAFN- The Journal Of Turkish Weekly) >The U.S.' Federal Reserve (Fed) is expected to signal an interest rate hike for this summer by inserting specific "wording" in their statements experts told Anadolu Agency Wednesday.

The Federal Open Market Committee (FOMC) responsible for making decisions about interest rates are due to release their statement after the Fed's two-day meeting concludes on Wednesday.

Experts said that there could be changes made in the statement by reinserting words that indicate a possible rate hike in the Fed's next meeting in June which would also prepare the markets to take a position accordingly.

"There may be some change in the language of the statement that may hit a rate hike coming this summer" said Satyam Panday a U.S. economist at Standard and Poor's.

Panday noted that the FOMC had dropped its phrase of "balanced risk" from its statements in January and March and said the key for a possible summer rate hike would be to see if the FOMC adds the risks as "balanced" in their statement on Wednesday.

"They can add back that phrase to their statement just to prepare the market for a possible rate hike in June or July. Right now the markets are not pricing in for summer rate hikes. The Fed would definitely want to lay the groundwork for a possible rate hike this summer if they are heading in that direction" he added.

Mark Zandi the chief U.S. economist at Moody's Analytics also said the Fed will signal if they intend raising interest rates in summer and the statement they will release on Wednesday will try to signal that intention.

"The key thing is the reintroduction of discussions regarding the balance of risks. They generally signal a rate hike by the wording they use around the risks to the outlook. That would be a step towards a rate hike this summer" he explained.

Regarding Wednesday's statement Panday said "the clue would be to look for something less of a concern about global risks. It was the global risks that gave them [the Fed] a pause in the previous meetings."

In its earlier meetings the Fed listed the risks as financial turmoil in global markets Chinese economy Britain's possible exit from the EU and the overall economic slowdown around the world which were referred to as having "downside" risks to the U.S. GDP growth and inflation.

If the statement includes the aforementioned lists as "balanced" not only would the Fed signal taking a step forward in raising interest rates this summer but the markets may also begin preparing for it.

- How will markets react?

"The markets would react the way they usually do -- they parcel out every line" Panday said and added as June approaches the markets will be paying close attention to each and every word from the Fed.

"In the next two or three weeks more wording and speaking from the Fed will come out ... The Fed and the markets will either converge to a summer rate hike or they will diverge" he said.

However Zandi warned that if the markets are on edge then this could lead to a decline in stock prices a slump in commodity prices a widening of credit spreads and all of these could force a delay in the Fed raising interest rates in the summer.

He added that weakness in the global economy and financial turmoil could also delay the rate hike reminding that the latter was what caused the Fed to remain cautious at its January meeting.

"At the moment it seems like the global economy is stabilizing but if it starts to weaken again that would be another reason for a delay" he said.

- U.S. economy

Pugnay admitted that there are still risks such as the Brexit's uncertainty and slowdown in China which would automatically tighten credit conditions.

"That would mean that the Fed does not have to raise its interest rates. After all the idea behind raising interest rates is to tighten the credit conditions. And if the credit conditions are already getting tightened through those channels [risks] then the Fed does not have to move and it will have more time to wait" he explained.

Nevertheless Pugnay emphasized that the underlying fundamentals in the U.S. are more resilient than what has been suggested.

Zangi highlighted some of the macroeconomic indicators in the U.S.

"The economy is strong and it is evident in the job market. The economy is creating a lot of jobs and the slack in the labor market is quickly being absorbed. And all the leading indicators are very positive the layoffs are at record lows labor force is surging and wages are picking up" he said and concluded that he views the likelihood of a June rate hike as being around 66 percent.

By Ovunc Kutlu and Gulbin Yildirim