Fed to keep options open for June rate hike: decision-day guide

Federal Reserve Chair Janet Yellen and her colleagues will have a chance this week to signal whether they want to raise rates as soon as June. The message is likely to be it's still an option, but far from a certainty. Here's what to expect when the Federal Open Market Committee releases its post-meeting statement at 2 p.m. Wednesday following a two-day meeting in Washington (no Yellen press conference is scheduled, nor are revised economic projections being released): STAYING ON HOLD, BUT FLEXIBLE Fed policy makers will keep the federal funds target range unchanged for a third meeting following the initial hike in December, which lifted rates held near zero since 2008, according to 91 economists and strategists surveyed by Bloomberg News. One move that could help pave the way for a June interest-rate increase would be to bring back phrasing similar to October's statement that found risks to the outlook were “nearly balanced,” Goldman Sachs economists Jan Hatzius and Zach Pandl wrote in an April 21 report. That kind of language means policy makers see roughly equal chances that the economy will turn out better or worse than forecast. After upgrading that assessment to “balanced” in December, officials omitted the so-called “balance of risks” clause from the January and March statements amid financial-market turmoil. Minutes from the March meeting showed that “many” officials saw the global situation posing downside risks to the U.S. economy. “It seems like the global outlook has improved a little bit,” said Roberto Perli, a former Fed official who's now a partner at Cornerstone Macro LLC in Washington. “If they raise the assessment, the market would upgrade the chances of a June move.” Financial conditions have improved since the Fed's March 15-16 meeting, with a Bloomberg gauge of market stress rising last week to the highest level since December. Stock prices, after declining the first two months of the year, have rebounded, with the Standard & Poor's 500 Index up about 2% for the year. THE RESOLVE TO BE GRADUAL Another option would be for the FOMC to keep but modify its comment that “global economic and financial developments continue to pose risks.” The group, for example, could say while these developments still pose dangers, “they have improved somewhat of late,” Mr. Perli said. Some Fed officials have worried investors are underestimating the FOMC's resolve to continue to tighten gradually. Regional Fed chiefs Eric Rosengren of Boston and Charles Evans of Chicago told investors this month that the committee's forecast for two more rate increases this year is a solid bet. Ms. Yellen said on March 29 that the FOMC should “proceed cautiously in adjusting policy,” citing global risks including slowing growth in China and the outlook for commodity prices, which have hurt business investment in the U.S. and some emerging markets. The global economy remains a source of concern. The International Monetary Fund on April 12 cut its estimate for global growth to 3.2% this year from 3.4% in January, and warned of a risk of global stagnation. BREXIT THREAT, GDP REPORT A new threat may be the U.K.'s June referendum on whether to stay in the European Union, which Atlanta Fed President Dennis Lockhart said on April 14 would be “a big event” and “a consideration” for U.S. monetary-policy makers. “Global risks are here to stay although the seas are calmer around the globe at the moment,” said Chris Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. He sees the statement doing little to signal June is on the table. “Caution is likely to rule the board and bank presidents,” Mr. Rupkey said, referring to the Fed's Board of Governors. “They aren't in any hurry.” A further complication is that any upgrade in the statement language comes as U.S. has stalled. The U.S. economy probably grew at a 0.6% annual rate in the first quarter, according to economists surveyed by Bloomberg, and the Atlanta Fed's estimate is just 0.3%. The government will release the preliminary gross domestic product report on Thursday, just a day after the FOMC meeting. Despite the weakness, the FOMC may strive to make few changes to its economic assessment while highlighting continued improvement in the labor market, said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York. The group may continue to describe growth as “moderate,” he said. “They expect growth to rebound after the first quarter, so they wouldn't want to be overly pessimistic as they believe this will be reversed,” he said. Still, some tweaking of the language may be necessary, including a downgrade to the assessment that household spending has been “increasing at a moderate rate.” Sales at retailers unexpectedly fell in March, led by the biggest drop in autos in a year. Kansas City Fed President Esther George is likely to dissent for a second consecutive meeting, favoring a quarter-point rate hike, according to Perli. Mr. George, in a speech this month in York, Nebraska, warned that low interest rates can foster asset-price bubbles including for real estate.