The key question investors and the Fed are trying to answer is whether this slight slackening presages a far worse outlook, even a recession, or whether reports of rising uncertainty merely reflect people’s feelings, not economic reality.
“The Fed always seems to look for ‘the preponderance of evidence’ and has done so even when it has been accused of being too slow to act,” Melissa Brown, managing director investment decision research at SimCorp, told Fortune. “I think now they particularly want to assert their independence, so until there is something resembling a preponderance—one way or another—it seems to me they are most likely to keep rates where they are.”
It’s important for investors to get a sense of where the outliers on the dot plot are as well because that will help them understand whether Fed officials are more concerned about high inflation or low growth, according to Mike Reynolds, vice president of investment strategy at Glenmede.
There are “two completely separate policy playbooks on how to deal with each,” Reynolds said.
It’s common for Fed officials’ outlooks to be somewhat similar around this time of the year. But that may not be the case currently. “Generally the dots for the year tend to coalesce around a consensus, given uncertainty we wouldn’t expect that [this year],” he told Fortune. “The dots will remain more dispersed than usual.”
Last quarter’s dot plot showed committee members expected slower growth and higher inflation compared to their December forecasts. This time around, they are contending with slightly more conflicting data, as manufacturing metrics and GDP outlooks fell despite the fact job growth has continued and corporate earnings remain strong, according to Brown.
The new developments that saw manufacturing investment slow and GDP growth slip in the first quarter still aren’t enough to spur action from the Fed. Given that the Fed will likely stay its hand on rates, investors will take to parsing Powell’s words even more closely. They’ll want to know if and how this new batch of data is affecting Powell’s outlook.
After several months of rampant instability and rising anxiety about the future of the U.S. economy, investors will be eager to see if the Fed believes all that concern is having an effect.
“We haven’t seen concrete action that’s followed through on this heightened uncertainty,” Reynolds said.
