The ECB talked about diminishing downside risks, at least to growth. In the US, the Federal Reserve faces materializing downside risks. Will it ignore them for now in hope they are blips? Or acknowledge the downturn, shut the door on a June hike and send the dollar down? 

Here is a preview of the May 3rd meeting with three scenarios.

Dovish hike in March

Back in March, they announced a rate hike to a range of 75-100 basis points. The hike was well telegraphed, but the tone was a downside surprise.

Yellen and her colleagues raised rates for the second time in three months, a quicker pace than the full year separating the first and second hikes. However, this was not accompanied by a revision of the outlook. The dot-plot still implies three hikes in 2017, growth forecasts were left unaltered and there was one dissenter, Neel Kashkari. The US dollar fell on that dovish hike.

Since then, Fed officials have sent mixed messages according to their biases, but they sounded relatively optimistic about fulfilling the rate hikes.

How’s the economy doing?

In one word: meh.

The economy grew at an annualized pace of only 0.7% in Q1 2017. This first assessment put quarterly growth at the lowest level in three years. The underlying figures have not been too upbeat: retail sales, durable goods orders and some housing measures have missed expectations.

What about the soft data? Contrary to the “hard data” (what actually happened in the past), the “soft data” (surveys about the future) have been more optimistic. But also these soft figures have softened: a weaker ISM Manufacturing PMI followed weaker consumer confidence.

Fed mandates still good, but

The Fed has two mandates: employment and inflation. The most recent Non-Farm Payrolls report consisted of weak job gains: 98K. On the other hand, it showed that wages are up 2.7% y/y – a healthy pace. This can support the theory of full employment. With fewer employees looking for jobs, job gains slow down but wages are on the rise.