Whether Chairwoman Janet Yellen and other members of the Federal Reserve see the economy bouncing back the rest of the year is the top question for this week's Fed monetary policy meeting in Washington.
Fed watchers are convinced that this week's meeting will not be the one to result in the Fed raising its target for interest rates. Instead, they are looking for the Fed to signal in its updated projections that the economy will be have recovered enough from its first-quarter weakness to make the move in September.
"Nobody expects they're going to change the rate," said Stuart Hoffman, chief economist for the PNC Financial Services Group. It's "more about the tone and the signals they'll be sending."
Following the conclusion of the two-day meeting of the Federal Open Market Committee in Washington, Fed officials on Wednesday will release their updated projections for economic output, inflation, unemployment and interest rates, and Yellen will hold a press conference.
The projections are expected to show that the Fed anticipates an economic rebound strong enough to warrant raising interest rates at its September meeting. The Fed has held rates near zero since 2008 in attempt to stimulate the economy. More recently, it has said that it will raise rates when it is confident that employment is growing and inflation is headed toward its 2 percent target.
Gross domestic product shrunk at an estimated 0.7 percent in the first quarter, but Yellen and some of the others in the central bank have said the problems were "transitory."
In March, the Fed's governors and regional bank presidents estimated that gross domestic product would total between 2.3 percent and 2.7 percent for the year. With the disappointing first-quarter data now available, those year-end projections will likely be marked down. The question is by how much. Private-sector forecasters also have revised down their projections, but most see some snapback over the rest of the year.
More recently, robust job gains for April and May, improving housing construction, and rising retail sales have the economy "looking pretty good, looking better than the last time they met," Hoffman said.
The majority of private-sector economists polled by the Wall Street Journal in June predicted a September lift-off for interest rates.
But not all Fed members necessarily agree. Fed governors Daniel Tarullo and Lael Brainard and Federal Reserve Bank of Boston President Eric Rosengren all suggested in public speeches in June that the problems in the economy might not just be flukes confined to the first quarter, and that growth really may be slowing down.
Yellen may try to bridge the difference in outlooks by underscoring in her press conference that even if the Fed does raise rates, it will do so slowly and only as long as the data remains strong. "Janet Yellen will use the words gradual, gradual, gradual," said Bob Eisenbeis, chief monetary economist at Cumberland Advisors and a former economist at the Atlanta Fed.
No matter what happens, Yellen will aim to take the mystery out of the Fed's plans, tying them to the performance of the economy as much as possible.
By the time the Fed is finally ready to announce a rate increase, "it will come gift wrapped with a notice that they sent out like a save-the-date card," Hoffman said.
That is crucial for investors who might fear a replay of summer 2013, when then-chairman Ben Bernanke's offhanded comments about possibly slowing the stimulus program caused stock market volatility and interest rates to rise.
"The impact is going to be not predictable," said Stan Corey, managing director at the financial advisory firm United Capital. Corey said that he is advising his clients to be prepared for a market "correction," or a stock market drop of more than 10 percent. The firm would "rather be early than late," he said.