The Federal Reserve looks all but certain to leave rates on hold but it might just hint at a slightly different pace of tightening. Market pricing suggests just a 5% chance of a hike today (May 3rd).

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The question for the dollar and Treasuries is whether the Fed looks a tad more hawkish than it did in March, or a tad more dovish. Recent data points to the latter as it will no doubt have to acknowledge the slowdown in Q1 GDP. Just how much attention it pays to this number should help decide the market reaction.

In March, Yellen said risks seem pretty balanced but the data since has been mixed. GDP barely moved in the first quarter but sticking to her mantra that this sort of data is ‘noisy’, chair Janet Yellen is probably happy to overlook the soggy numbers for now. One quarter of weaker growth doesn’t mean much and anyway, monetary policy is decided by expectations further out on the horizon.

But it’s not just the GDP that’s disappointed. March nonfarm payrolls came in at a pretty puny 98k. The Fed can easily overlook this for now but again it’s hardly supportive of the Fed taking a more hawkish stance than it did back in March. As we noted then, any temptation to raise rates quickly is tempered by labour market slack, which is greater than the headline figures suggest and means there is little pressure on wages.

We also have to think about the climate leading up to the last Fed meeting. There was a lot of talk about a hawkish surprise that failed to materialise. We’ve already seen some softening in the dollar since then, with the dollar index roughly 2% lower from its early March levels just before the last FOMC meeting.

A 25 basis point hike had been telegraphed before but expectations that the Fed would raise its expected hikes for 2017 from 3 to 4 didn't materialise and so the dollar has fallen. However what we did see was greater consensus among policymakers for three hikes this year, which shouldn’t alter today.

Today’s Fed meeting is unlikely to ruffle too many feathers or give traders fresh reason to buy dollars but should leave the door very much open to a rate hike in June. On the issue of shrinking the balance sheet, we have to assume the Fed will remain very cautious indeed.

Currently the market is pricing in a roughly 70% chance of a 25 basis point increase in the fed funds rate at the June 14th FOMC meeting. The meeting today could just shift the needle here a touch but is not going to alter the longer-term trajectory for interest rates.

At the meeting in March we saw consensus around growth picking up and inflation holding near to the 2% level. The FOMC members agreed that inflation is expected to stabilise around 2% target, which would imply the Fed thinks there is no requirement to raise rates particularly quickly. It also says the inflation target is symmetric, suggestive of an inclination to allow inflation to overshoot. This chimes with what we had expected before the meeting - the risk of inflation picking up is less than the risk of choking off a recovery by hiking too aggressively. Neel Kashkari voted against the hike in March, which shows there are still doubts about just how quickly and how far the Fed should raise rates in this cycle. The Fed is at last normalising but there is no need to rush the job.

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