At her first press conference in March, Janet Yellen was asked if she would pause the Federal Reserve's taper if economic growth fell to zero. The Fed chairwoman effectively dodged the question, and she's probably glad she did, now that she's likely going to continue the taper despite a quarter of negative growth.
In March, Yellen called the possibility of zero gross domestic product growth "extreme," but hedged that the key consideration for her in managing the Fed's large-scale bond purchases was not the headline GDP number but the expectation that employment and inflation were rising.
So even though GDP growth for the first quarter was revised to negative 1 percent at the end of May, "another $10 billion tapering is virtually certain" when the Fed meets Tuesday and Wednesday, according to the consulting firm High Frequency Economics, as inflation is expected to rise and unemployment is projected to fall.
That's because Fed officials are likely to attribute the weakness in the first quarter to unusually harsh winter weather and other one-off factors, and look to other indicators such as inflation and business sentiment as signs of faster growth through the rest of the year.
In all likelihood, the odd result will be that the Fed will downgrade its projection for 2014 growth but at the same time upgrade its forecast for falling unemployment. In March, the Fed projected growth to check in at 2.8 to 3 percent, which is now unrealistic, given the loss in the first quarter. But it also placed the year-end unemployment rate at 6.3 to 6.1 percent — that now seems conservative, considering that the rate has fallen to 6.3 for the past two months already.
Another $10 billion reduction in its monthly Treasury and mortgage-backed securities purchases would bring the total to $35 billion, down from $85 billion in December, and maintain a deceleration that would bring quantitative easing to an end by the fall.
One unknown about Wednesday's announcement is the influence that the new Obama appointees to the Federal Reserve Board will have on the Fed's message and projections. The inclusion of newly installed Vice Chairman Stanley Fischer, the former Bank of Israel head, and Lael Brainard, previously a member of the Obama Treasury Department, "probably entails a dovish shift" in the monetary policy committee's composition, according to Goldman Sachs research. Investors will be looking for signs that the new Fed members will push for lower interest rates for longer.
Before the Fed makes its policy announcement Wednesday, it will get a look at the consumer price index data for May on Tuesday. The Bureau of Labor Statistics reported that inflation rose to 2 percent in April, right at the Fed's target. Stripping out volatile food and energy prices, however, inflation was 1.8 percent. The Fed's preferred measure of inflation, core personal consumption expenditures inflation, is even lower, at just 1.5 percent in the latest reading, for April.