A Federal Reserve meeting always draws market interest, as investors are on guard for policy signals. However, the statement from this week’s meeting is likely to be devoid of new information. It may tweak its economic assessment as the recent data warrants, including the continued improvement of the labor market, and better capital investment.
Inflation, it will likely note, is near target. In the quarterly calculation of GDP, the core PCE deflator accelerated to 2.0%, though the monthly estimate is a little lower. The continued gradual removal of accommodation will be justified, though there is no reason to expect an explicit signal that it intends to hike rates at the June meeting. With the cycle underway, there is not need for that level of forward guidance. It is also unreasonable to expect fresh revelations about the balance sheet strategy. Discussions are ongoing, and there is not need for any decision yet.
The Federal Reserve may be a bit disappointed with the preliminary estimate for Q1 GDP, but it does not appear to put much stock in the quarterly growth numbers which a subject to statistically significant revisions and is particularly noisy. Also, there are some elements of GDP that are not necessarily subject to monetary policy, like government spending, inventory accumulation, and foreign demand. This measure, private final domestic purchase rose 2.2%, which is probably understood to be a little above trend.
Moreover, there is a good reason to expect that growth is already re-accelerating. Part of the weakness in consumption was a fluke due to warmer weather and utility usage. There are two reports this week that may impact expectations about the June FOMC meeting more than the May statement. Auto sales and employment were soft in March. They can be expected to bounce back smartly in April as the impact from a winter storm reverses. A recovery in auto sales will likely set the tone for retail sales more broadly.
Non-farm payroll growth is expected to snap back toward its underlying trend, and anything above 200k at this stage of the cycle must be considered robust. Before the sub-100k increase in March, the six-month and 12-month averages straddled 190k. Average weekly hours may tick up to 34.4 hours. It has been averaging 34.4 hours for the last 12 and 24 months. Remarkably, and with little fanfare, the US economy has achieved what the French state struggled to do, and that is a 35 hour work week. Â
A 0.3% increase in April average hourly earnings will maintain the year-over-year pace of 2.7%, which is what it has averaged over the past six and 12 months. The modicum improvement is evident in coming it to the 24 month average of 2.5%. The Employment Cost Index was reported before the weekend, and it is thought to be the Fed’s preferred measure of wage inflation.  It accelerated in Q1 to 0.8% from 0.5% in Q4 16. It is the fastest pace since the end of 2007. The wage component of the ECI is up 2.3% year-over-year. The Beige Book also picked up wage pressures. The trend strengthens the case for a gradual adjustment of Fed policy.
