The Federal Reserve is not expected to raise interest rates on Wednesday, and it won’t. Instead, through both its statement and the news conference by Chair Janet Yellen, it will communicate an updated assessment of the U.S. economy and the implications for future policies.
Here are the six main points the central bank will convey:
1. The Fed will paint a mixed picture of the U.S. economy overall, even as it takes note of the unsettling employment report for May, and in particular the disappointing pace of job creation.
2. In part, the Fed’s caution will reflect the highly fluid global environment. This prudence is influenced not only by timid international growth but also by the great uncertainty associated with the referendum next week on whether the U.K. will remain in the European Union.
3. In commenting on financial market behavior, the Fed may acknowledge that volatility has been relatively subdued, despite unusual global economic and financial developments. It might also take comfort from the notable out-performance of the U.S. in the declining global equity markets recently.
4. Although the Fed could take note of the influence of external forces on longer-term U.S. yields, it is unlikely to make too much of the growing list of (once) improbable and unthinkable events that have come to pass in fixed income markets around the world (including, this week, negative yields on 10-year German government bonds).
5. In updating their “dot plots” (that is, the quantitative indicators of economic and policy prospects that are prepared by members of the Federal Open Market Committee), the “average” projection of Fed officials will keep open the possibility of two interest rate hikes this year but lean toward fewer hikes thereafter than had previously been signaled.
6. The collective FOMC view is likely to pull the projection of the long-term interest rate (also known as the terminal rate) down from 3.3 percent and closer to 3 percent.
Mohamed El-Erian is chief economic advisor at Allianz SE.