Fed Sticks to its Data Dependent Tone

In a widely anticipated move, the Federal Reserve’s Open Market Committee left the fed funds rate at the zero bound last week. The more important details from the Fed’s statement were their assessment of economic conditions and of the outlook for employment and inflation. As they have done in other recent communications, the FOMC struck a tone of cautious optimism, calling the economic weakness in the first quarter transitory and likely to reverse over the course of 2015. They did however reiterate that monetary policy decisions are data dependent and will be driven by continuing improvement in the labor market and confidence that inflation will move back towards their 2% target. On both fronts, data last week didn’t do much to drive a change at the Fed any time soon. PCE, which is the Fed’s preferred inflation measure, fell to 1.3% year over year, down from 1.4% year over year last month. The employment component of the ISM manufacturing index was also weak. After the weaker than expected nonfarm payroll report in March, April’s number, which will be released on Friday, becomes extremely important. Should that number fail to break the 200k gain level, it will raise more questions about the strength, or lack thereof, of the economic recovery, and the Fed will be in no hurry to move off the zero bound.

Sources: Bloomberg, Federal Reserve