Uncertainty, Dissent, and Mixed Messages Ahead of Fed Statement on Rate Hikes

The Federal Reserve is expected to do a cautious dance when it releases its statement Wednesday, as it leaves the door open for a rate hike in June but is not signaling one.

After two days of meetings, the Fed will release a 2 p.m. statement Wednesday. The statement is not expected to be much changed from its last one, but Fed watchers say the nuances will be important. There is no press conference where Fed chair Janet Yellen can provide further clarification, so markets will have only the statement to respond to.

The Fed is expected to be dovish in its statement, but the bond market clearly has been fearing it will be a bit more hawkish, and yields have been rising. Market expectations are for the next rate hike to come early next year, but the Fed has said it expects two rate hikes before then, so there is tension around any statement it would make.

"I don't think they're going to tip their hand on the policy section of it. I think the hawkishness might come in their description of the economy, because credit spreads have come back and are no longer a worry. The stock market is no longer down 10 percent on the year. Even the G-20 was less concerned about the economic outlook for the world," said Chris Rupkey, chief financial economist at MUFG Union Bank.

But the U.S. economic data has been spotty, with more than a few misses recently. Durable goods was weaker than expected Tuesday, and first quarter GDP, expected Thursday, is predicted to be just barely positive.

Fed officials have also been sending mixed messages about rate hikes. For instance, Boston Fed President Eric Rosengren, viewed as a dove, has said the markets have it wrong and are not pricing in enough rate hikes.

"The problem is you've got disagreement. The gap has widened," said Diane Swonk, CEO of DS Economics. "You've got dissents. When you have dissents, you have volatility." Cleveland Federal Reserve President Loretta Mester is expected to join Kansas City Fed President Esther George in dissenting Wednesday, as they object to the Fed's lack of rate hikes.

"I don't think they can put the balance of risk back in, because they can't agree what the balance of risks are," said Swonk. "It just means continued uncertainty, continued uncertainty for the market."

Michael Arone, chief investment strategist at State Street Global Advisors, also said the Fed is unlikely to suggest that risks are balanced.

"If they tell you it's nearly balancing, that'll be a signal that June is on the table," said Arone, adding he does not expect to see that.

Arone said the Fed will want to leave options open. "I don't think this Fed, and Yellen in particular, likes to paint themselves into a corner," said Arone. "The statement will acknowledge that growth in the economy is modest. They haven't seen the flow through to inflation and they'll remain data dependent going forward."

He said he will be watching to see if Yellen's view is dominant in the statement. "My view is what Yellen did with her Economic Club of New York speech (March 29), she was saying: 'I'm the chairperson. This is my view. We're going to go slow and gradual.' At the time, other Fed officials were talking about how April was still on the table," Arone said. "I think what markets are going to be looking to see is if that remains the message or if we're back in this kind of limbo."

It will also be important to see if the Fed gives any nod to stability in international markets now that China has calmed some of the fears around its economy.

Besides the Fed, there is the trade deficit data at 8:30 a.m. EDT and pending home sales at 10 a.m. EDT. There is a 10:30 a.m. EDT government inventory data on oil and gasoline, and the Treasury auctions seven-year notes at 1 p.m. auction.

Earnings before the bell include Boeing, Comcast, GlaxoSmithKline, Mondelez, United Technologies, Anthem, Northrop Grumman, Dr Pepper Snapple, Nasdaq OMX, Nintendo, State Street, Tegna, Garmin, Six Flags and General Dynamics. After the bell, reports are expected from Facebook, PayPal, Marriott, SanDisk, Cheesecake Factory, La Quinta, Rent-A-Center, First Solar, Texas Instruments and Vertex Pharmaceuticals.

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