All eyes of economists looking at the meeting on Tuesday and Wednesday of the Federal Reserve’s interest-rate setting committee will be on the dot plot, the chart that shows the committee’s projections of the path of interest rates through 2016.
But the dot plot is an odd duck (it doesn’t distinguish between voters and non-voters) and won’t answer all the questions Fed watchers want answers about from the central bank. Here are five of the questions that might be answered by the statement, the forecasts or Fed Chairwoman Janet Yellen’s press conference. The statement and forecasts come Wednesday at 2 p.m. Eastern, followed by the Yellen press conference at 2:30 p.m.
Any new worries about inflation?
Inflation has been stirring. Just before the start of the Fed meeting on Tuesday morning, the Labor Department reported U.S. consumer prices rose sharply in May for the second straight month and the rate of inflation over the past year reached 2.1%, its highest level since late 2012. After worrying about low inflation last year, has there been any change in attitude about higher prices from Fed officials?
Any less optimism over the economy?
In April and March, Fed officials knew that the first quarter was going to be weak but they had no idea it was going to be this weak. Economists have now penciled in a 2% drop in GDP in the first three months of the year. Beyond causing the Fed to lower its growth projections for 2014 (currently, 2.8% to 3%), has the data made the Fed more worried about the outlook? In the last two Fed meetings, officials were pretty sure confident the economy would bounce back to a sustained period of strong growth.
How much slack in the economy?
Was there any progress bridging a key divide among hawks and doves about how much slack there is in the economy, specifically the labor market? The U.S. created 217,000 nonfarm payroll jobs in May and the unemployment rate held steady at 6.3%. Doves argue that several indicators like the number of workers employed part-time even though they want full time jobs suggest there is more slack than the unemployment rate alone suggests. Other Fed officials think the labor market is as tight as the unemployment rate suggests.
For a few years, the Fed has said that it would start shrinking its balance sheet before it hiked short-term interest rates. But in a speech last month, New York Fed President William Dudley said the Fed might hike rates first before tackling the$4.3 trillion balance sheet.
Is the Fed itself a big headwind?
In the same speech last month, Dudley suggested that the higher capital standards for banks might be one reason why the economy is straining to grow about 2%. This is not something that other Fed officials have talked much about, at least in public. Is this a factor in why the Fed thinks that it expects to keep short-term interest rates below normal even after it has reached its goals of 2% inflation and low unemployment?