In its quest to find just the right time to raise interest rates, the Federal Reserve seems to have discovered a third mandate: creating a perfect world.
Recent post-meeting statements from the Federal Open Market Committee show that the U.S. central bank has gone well beyond its congressional dual mandate for price stability and full employment. Instead, the Fed now sees global growth as a principal condition for when it will enact another rate hike.
The April statement saw what appeared to be a modest tweak from March, going from an assertion that global issues "continue to pose risks" to the Fed continuing "to closely monitor ... global economic and financial developments."
For some on Wall Street it was a sign that a June rate hike is on the table as global concerns dissipate, while for others it either didn't mean a whole lot or wouldn't be enough to signal that the Fed will make its first hike since December. Along with the vote to raise rates a quarter point, Fed officials then indicated a path — since halved— toward four increases in 2016.
"Bottom line, I'm even more confused as to what factors are influencing them. If the sentence ... on international developments was the reason why they didn't hike in March, what is the excuse this time?" Peter Boockvar, chief market analyst at The Lindsey Group, wrote after the meeting. "All I can say again is that the Fed has and continues to wing it and for all the talk about being data dependent, they've completely neutered the concept because we no longer know what data they are depending on."
The verbal linguistics over the weighting of global versus domestic events in the Fed's decision-making sparked grumbles that echoed across Wall Street.
"The FOMC's apparent whimsical citing of global and financial developments as important policy influences makes monetary policy more uncertain. There is little doubt financial conditions have improved along with modest improvements in the global outlook since the March FOMC meeting," Citigroup economist William Lee told clients. "Instead of reassuring markets, the FOMC's arbitrary and ad-hoc use of global influences to justify policy timing raises the uncertainty of monetary policy."
There was great debate over what it all meant: Lee doubted the Fed would find impetus to hike rates before September, but others disagreed.
As far as trading went, Fed watchers modestly upped the odds for a more aggressive rate path. Still, chances for a June hike are just 19 percent, according to the CME's FedWatch tool, with the first month with a better than 50 percent probability not until September, at 52 percent.
Still, traders are putting the September funds rate at 0.49 percent, just 12 basis points, or 0.12 percentage point, ahead of the current level. A full quarter-point rate hike isn't priced in until February 2017, with an expected funds rate of 0.63 percent.
Even with the Fed's reduced expectations for rate increases, there remains a communication gap between the central bank and the market.
"The Fed has put themselves in this unenviable position of having to answer every little wiggle in the market," Joseph LaVorgna, chief U.S. economist at Deutsche Bank, said in a post-meeting interview. "The Fed has now become accountable and (asked to) answer things which are unanswerable."
For the road ahead, the Fed will get to pick its poison between a rocky global landscape that has become increasingly inhospitable to central bank actions (as in Thursday's Bank of Japan foul-up) and a weak domestic climate, where GDP growth in the first quarter was a measly 0.5 percent.
There are those on Wall Street who are bemoaning the notion that the Fed is letting global conditions figure into its decision-making, but the de facto third mandate remains.
There was even discussion from several economists that June's "Brexit" possibility (Britain leaving the European Union) will delay a hike at the next FOMC meeting, which happens days before the vote.
"Considering the Fed's heightened sensitivity to global financial and economic developments, the Fed could be forced to delay raising rates until there is some clarity on the referendum. Markets are already jittery, as U.K. credit default swaps have steadily risen this year," Ryan Sweet, director of real-time economics at Moody's Analytics, said in a note. "The Fed will have to boost market expectations if it is to move in June."