Benchmark Special: Five Things to Know About the Fed Meeting

editor for Bloomberg News in Washington. Today we're bringing you a special bonus edition devoted to the Federal Reserves meeting this week. Joining me in our DC studio are my colleagues Chris Condon and Ginas Smilek, who cover the Federal Reserve. Al Right, the Federal release its interest rate decision on Wednesday. Now, no rate hike is expected, and we're just going to get a statement with no press conference from Chair Janet Yellen. So what should we care about? We're going to tell

you the five things you need to know. Chris, you lead off with number one, jobs and the economy. So right off the top of the statement, we're going to get this usual assessment of the economic conditions, and I think right there we're gonna start with a pretty positive note overall economic conditions. Now, remember, I think it's important to remember the first quarter of this year was pretty disappointing.

The second quarter was a fairly good rebound, and already by June we saw the Committee saying that economic activity appeared to have picked up. They have more reason for a little more confidence, I think now this meeting Scott, from the numbers, we're seeing growth on an annualized basis in the second quarter could be over two percent, and some of the initial indications are that the third quarter

is also going pretty well. So there again we're going to see something positive on the job side, to again a positive signal. Again, let's step back. May was an absolutely stinker of an employment report, what eleven thousand new jobs in that month, but rebounded very strongly in June two eighty seven thousand. Now, the Committee is not likely to sort of swing wildly from one reaction to another.

There more likely to somehow acknowledge that the trend, looking at all of these, while slowing down a bit, is still pretty positive, still strong enough to add jobs in lower unemployment. So the takeaway from that is that that's a sign that they that they might actually raise interest rates this year, right, that would push them in that direction. That's right, all right, Gina. Number two, what do they say about global developments now that Brexit has shaken things up?

So the global outlook is going to be a major focal point at this meeting, And like you said, because of Brexit, what we saw in the June meeting is the FED was giving us an indication that is going to continue to closely monitor global developments. Now we've since that meeting, we've had the Brexit, so British vote to exit the European Union, and we know that that could introduce a lot of uncertainty going forward because obviously they

still have to negotiate the terms of that now. At the same time, we've heard from quite a few FED officials that they're not overly concerned about Brexit, you know, they think it could be sort of something marginal to the U. S economy, but it does introduce a lot of uncertainty into the outlook. So I think what kind of indication we see around Brexit, whether there's any sort of explicit reference to it, is going to be a

really strong either devish or hawkish signal. Okay, let's go back to Christopher number three, what do they say about the pace of rate hikes and their timing? Right? So here, I think we're gonna run up into the problem of very short and rather vague, sometimes purposefully vague statement. What do we see in June? We saw this that the committee expects that anomic conditions will evolve in a manner that will warrant only gradual increases in federal funds rate.

Probably reasonable to expect that they're going to keep that exact language in there, so we don't learn anything explicitly new. But at the same time, we know that there will be a debate going on about how many times they should be prepared to raise interest rates this year, with some of the Hawks arguing, like Esther George from Kansas City Loretta Master from Cleveland, who are both voters this year, they'll likely be urging the committee to keep the door

open for a September rate increase. Others will be arguing more dubbish ly that perhaps the Fed may not be able to raise at all this year. Where does the center of the committee fall, Where does chair yell and fall? We don't really know, and we're unlikely to learn anything very specific from the state. One thing we do know about this committee under Janet Yellen, they do like to keep their options open. So I think it's fair to expect that we're not going to get language that rules

out September. But neither are we going to get language that explicitly signals us that they're likely to move in September. But if they don't change the language at all, then people are going to take If they don't actively signal that they're probably going to move in September, people are probably going to think that they're going to skip that, right,

They could well do that. One thing to bear in mind, though, if additional really strong data does come in after this meeting and the Fed thinks that they're going to have to prepare the markets for a move in September. Janet Yellen is scheduled to speak in late August in Jackson Hole, Wyoming at the Kansas City FEDS Annual Symposium. That will be very closely watched. She'll have all the opportunity in the world to give a different and signal. At that point, Gina,

you're up for number four. Inflation is still low and bond yields have fallen even further since the last meeting, What could they say about this? You know, the fact, as you mentioned, inflation is still low, bond yields have fallen lower. I think that gives them a lot of room, um to remain cautious about inflation. UM. So we have seen a core inflation in particular start to move up

a little bit. But in their past statement they mentioned that, you know, inflation has continued to run below the committees to percent longer run objective, and you know that allowed them to sort of still take their time with hiking. And I think that that status quo sort of still stands because even as core inflation moves up, there are all these factors that are keeping it down on the edges um, and I think that they're going to take

all the room and back and give them. So that would probably be a factor in not raising rates any time immediately, right right, absolutely. I think in a world where you're worried about job growth, you're worried about the global economic outlook, the fact that inflation still remains subdued means that you don't have to be in any hurry to move those rates up really quickly. All right. Finally, number five, the actual vote it was unanimous last time

in favor of leaving rates unchanged. What do you think is going to happen this time? I think many people will expect the previous dissenter, Esther George to return to that column. I in fact, was out to Lake Ozark, Missouri a couple of weeks ago and heard her speak. Um. That was after the June meeting, and Esther acknowledged that at that June meeting she she voted with the rest of the committee out of her concerns about the main

jobs report and the then pending Brexit vote. Um. But since those things, because of the June jobs report, because of how markets had calmed down after the vote in the UK, that she was back basically to her usual stump speech about the risks of moving too late. So I think it's fairly reasonable to expect a descent from her. I think do you think that as well? Yeah, I think that's accurate. And you know, another person of interest

at this meeting I think is James Bullard. So he at the after the last meeting released a special statement where he said, you know, I think we have one more rate increase and then we're pretty much on hold. And he didn't say when that one rate increase should be. And so I was at a press groom with him the other day, and you know, he got the question, why wait, you know, if you expect one more to be necessary, why not just go ahead and do it?

Um And so I think some some focus is going to be focused on him, just you know, is he going to be is he going to descend? Is he going to say we ought to just go ahead and do this one rate increase. But it's interesting because his reply to this question was, you know, I move on good news. I only move on good news. And it seems to me like we haven't had the kind of good news he'd be looking for. But it should be interesting to watch that vote and how that plays out.

So in that case, I would say we we kind of take in favor of raising rates, uh sooner given that if Esther George switches back to it. Is that fair marginally? So? Yes? Alright? Well overall, I think from that I counted slightly more factors in favor of keeping rates on hold for the next meeting or so rather than moving closer to a rate increase. Is that fair? I think that's what we're hearing and I you know, one thing to caution is, no one's really expecting a

rate increase this month. Obviously, everyone is looking at what this is going to mean for September and how it's going to set September up. And I think what we're hearing is the feed is probably not going to really really bring September onto the table. That that's what economists are telling me, not yet, and and and don't forget they'll repeat their refrain, maybe not in the statement, but they'll be very soon repeating their refrain that their data dependent.

They will want to see more data, and there will be some significant economic data coming in between this meeting and the meeting in September. And one thing that Chris continually cautions me to remember, which is a really good point, is while the FED lights to signal rate rate increases before they happen, they are going to have Jackson Hole

to do it this time. So there's no real pressure for them to get that in this statement because they'll have more messaging time in between now and the next meeting, and that takes place in late August, right right exactly, Well, that was really fascinating. Uh, we're all going to be on the edge of our seats as always this Wednesday at exactly two pm when the headlines hit our wire. So thanks Chris, thanks Gina for taking the time to

talk about this today. Awesome, Thanks Guy. Thanks. Benchmark will be back with our regular episode later this week, and until then, you can find us on the Bloomberg Terminal and Bloomberg dot com, as well as on iTunes, pocket casts, and Stitcher. You can talk to and follow us on Twitter. Chris is at Chris ja Condon, Gina is at at Gina Smile s M I A L E K, and I'm at Scott Lanman s c O T T L

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