The FOMC announcement this week is likely to be dovish. Growth has been weaker than expected, not just due to weather, with the recovery in the housing market proving to be more fickle than expected.
This will change the forecasts and perhaps the rhetoric from the FOMC, but probably won't change the path of tapering of QE. The Fed clearly sees diminishing returns to asset purchases and probably don't feel compelled to change tapering if interest rates remain at low levels.
Q1 GDP looks set to contract by more than 1.5% on an annualised basis, with the bounce into Q2 not appearing as vibrant as many were hoping. This leaves the March forecast of annual growth of a little under 3% too high.
There was a huge amount of focus on the "dots" on the FOMC projections in March, with a slight shift in expectations for rate hikes in 2015 shifting market expectations significantly.
With growth forecasts likely to be forecast downwards, it seems likely that the "dots" or blobs in the chart below will shift back to the same configuration seen back at the end of 2013.
Rate hike expectations have actually shifted up a little over the past few weeks according to Fed Fund futures, although these are likely to track back to end-May levels following the release of the FOMC projections.
The sogginess of inflation may see some downward revision to inflation forecasts, but inflation expectations have actually picked up to be much closer to 2% than they have been for about a year. This is another factor that will keep the FOMC on a steady path even if the actual inflation numbers have been disappointing.
