Fed's 'forward guidance' shift leaves markets more wedded to data

Wed Apr 27, 2016 6:54pm EDT
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By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) - Rising oil prices and a more stable Chinese economy allowed the Federal Reserve to shift its focus back to the home front on Wednesday, as it signaled that U.S. jobs and inflation data would determine whether it hiked interest rates in June.

The U.S. central bank gave little hint of how it was leaning in the wake of its latest policy meeting, issuing a statement free of the forward-looking guidance it has used to massage expectations in markets and within the public.

A previous reference to global economic risks, generally seen as a red light for any rate hike, was dropped from the statement in what appeared to be an attempt to coax investors back onto a diet of U.S. economic data. That is something Fed Chair Janet Yellen and other policymakers have been trying to do for months.

In a note issued after the Fed announced it had kept rates unchanged, Barclays analysts said the central bank now "desires maximum optionality" that will allow it to hike rates at its next meeting in June without having to strongly signal it will do so.

"The Fed was trying to walk a very fine line. They wanted to leave June open ... But they don't want it to be a 100 percent (certainty) either," said Don Ellenberger, a senior portfolio manager with Federated Investors in Pittsburgh.

The Fed's focus moving ahead will be on employment, economic growth, and perhaps most importantly whether inflation begins to show any evidence of increasing from its current low level to the central bank's 2 percent target.

Since last year, Yellen has tried to push a "data-dependent" approach in which investors and households develop their sense of Fed policy from the performance of the economy, rather than through central bank statements.

Investors currently put the chances of a June rate hike at just more than 20 percent, meaning the Fed may go more than half a year between its rate hike last December - the first in nearly a decade - and the next one. That is a glacial pace.   Continued...

U.S. Federal Reserve Chair Janet Yellen removes her glasses during a press conference following the two-day Federal Open Market Committee (FOMC) policy meeting in Washington March 16, 2016.  REUTERS/Kevin Lamarque