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Will the Federal Reserve message that it is no longer “patient” at the conclusion of its Federal Open Market Committee meeting on Wednesday?
The semantics behind the word “patient” have been dissected since Fed Chairman Jerome Powell first deployed the word in the Fed’s January 31 meeting, when policymakers flipped dovish and softened their stance on wanting to raise interest rates to the economy’s “neutral” level.
Powell’s “pause” hinted that the Fed was still leaving rate hikes on the table.
But building trade tensions and lackluster economic data has pushed some Fed officials to publicly acknowledge the case for a rate cut. And expectations for the Fed to drop its “patient” language, in addition to one or two dissenting votes, could make the June meeting the tipping point for the “pause” to turn into a full stop.
Wall Street is expecting the FOMC to keep rates steady at the current target range of 2.25% to 2.5%, but Powell’s commentary — in addition to the dot plots scheduled for release — will be increasingly in view as markets try to decipher the degree of dovishness as the Fed flips more neutral.
Flexible?
Goldman Sachs wrote June 14 that the Fed is likely to drop the word “patient,” and Barclays predicted that the Fed will replace the word “patient” in the FOMC statement with “flexible.”
“[W]e think the word ‘patient’ in the FOMC statement has served its useful life,” Barclays wrote June 13. “In our view, retention of ‘patient’ would likely sound too hawkish to markets that are already pricing easing in July and around 100 [basis points] of easing over the next four quarters.”
Key Fed officials have already hinted at the possibility of easing policy. On June 4, Powell sent markets higher after he delivered prepared remarks promising to “act as appropriate to sustain the expansion,” referring to the downside risks of the trade spat between the U.S. and China. In May, trade discussions broke down and the U.S. increased tariffs on about $200 billion worth of Chinese imports from 10% to 25%. The administration has threatened another round of tariffs, on an additional $300 billion worth of goods.
Fed Governor Lael Brainard echoed Powell’s comments in an interview with Yahoo Finance the day after.
“Trade policy is definitely a downside risk to the economy, and our job is to sustain the expansion,” Brainard said on June 5. “And we’ll need to see going forward what that means for policy.”
[See Also: Transcript of Fed Governor Lael Brainard’s appearance on Yahoo Finance]
Although neither Powell nor Brainard committed to explicitly lowering rates, their stated commitment to extending the U.S. expansion reflects the acknowledgement of downside risks to the economy.