The Federal Reserve is expected to signal that it sees the paltry economic growth in the first quarter as a temporary phenomenon that will not get in the way of its plans to raise interest rates.
The Fed has forecast two more interest rates hikes for this year, and the market thinks odds are greater than 50 percent that the next hike will come in June.
Following its two day meeting Wednesday, the Fed's Federal Open Market Committee is expected to hold its Fed funds target rate range steady but issue a statement at 2 p.m. ET.
"I don't expect them to say anything dramatically different in terms of guidance. They'll have to acknowledge the weak first quarter. I think they'll be cautiously dismissive over the first quarter GDP number," said Luke Tilley, chief economist at Wilmington Trust.
Warm weather early in the quarter followed by snow storms in March is one excuse economists have pointed to for the sluggish growth of just 0.7 percent in first quarter GDP.
"They could chalk up the consumer weakness to weak utility spending in January and February," said Tilley.
After the weak first quarter, economists expect the economy to bounce back in the second quarter, with some forecasting better than 3 percent growth.
But inflation is one of the key data points that have disappointed, and economists say the Fed could say something about it.
"The March inflation reports CPI and PCE [personal consumption expenditures inflation index] were pretty weak. There were one off factors which explain the decline. If they wanted to send a dovish signal, I actually think it will be through the inflation language, sounding a little less confident that they'll see inflation move on to their 2 percent target," said Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch. March's core PCE, without food and energy, fell to a pace of 1.6 percent.
Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management, said he is also watching the Fed's comments on inflation. "If they come out overly concerned about the down tick in core PCE then we're going to scratch our heads pretty hard. That would be a surprise, so I think the thing to look for is if they fixate too much on the inflation number. Everything else says hike. If they fixate too much on the inflation number, it's going to cause a lot of question marks," he said.
The first quarter also saw a slow down in growth in consumer spending, and while that is expected to be temporary, a slump in April auto sales raised more concerns about consumers Tuesday. Economists say it's too soon to blame consumer weakness for the slower pace of sales — to 16.8 from an expected 17.5 annualized selling pace, since some of the softness has been the result of tighter lending standards.
"They got to 17.5 million by pulling forward sales. This year they've given up on that, particularly on the lending side. Delinquencies rose and loan quality eroded, and so they pulled back," said Mark Zandi, chief economist at Moody's Analytics. "This has more to do with the dynamics in the lending market than it does to have anything to do with the strength of the consumer."
Zandi did say consumers were less aggressive than he thought they would be, but he does not foresee a larger problem.
He expects the Fed to make few changes in its statement, and since the market expectations are in line with the Fed's forecast, Fed officials will work to keep them that way. "They'll work to reaffirm. They'll say effectively they're looking through it [economic weakness,]" he said. Rate hike expectations have moved higher in futures markets, after retreating during the uncertainty surrounding the first round of the French presidential election last month.
Traders are also watching Wednesday's statement to see if the Fed will say anything about fiscal or tax policy, neither of which has a clear time table at the moment. President Donald Trump sent a shiver through the bond market Tuesday when he tweeted that the U.S. "needs a good 'shutdown' in September to fix mess!"
Perhaps one of the most talked about aspects of the Fed meeting will not be released in its statement Wednesday. Economists do not expect to hear any mention of the Fed's balance sheet, which it has said it could begin to reduce this year. That talk will stay behind closed doors but show up instead in the minutes of the meeting, when they are released May 24.
Fed officials have indicated they could announce a plan to reduce the balance sheet later this year. The $4.5 trillion balance sheet ballooned as the Fed bought securities to fight the financial crisis and the sluggish growth afterwards.
The Fed could begin to trim its balance sheet by simply ending the purchases it makes each month to replace Treasury or mortgage securities that mature.