Economist's Insights

FOMC Confident on Inflation Outlook; June Hike Likely

May 2, 2018

The FOMC voted unanimously at its May meeting to keep its target overnight rate range at 1.50-1.75%.  The details of the Official Statement include a slight upgrade to the Committee’s economic assessment and a notable improvement in their confidence regarding their inflation target.

On the economy, the Statement characterized business fixed investment as “grow[ing] strongly”, an improvement from the previous Statement which said it had “moderated” from its strong 4Q growth.  This was the only noteworthy change to the economic assessment.

The assessment of the inflation outlook was the focus of this afternoon’s Statement.  The Statement noted that headline and core inflation have “moved close to 2 percent” and now states that they expect inflation to “run near the Committee’s symmetric 2 percent objective over the medium term.”  Additionally, a line saying that “the Committee is monitoring inflation developments closely” was struck from the Statement’s risk assessment.  This phrase was originally included to note the Committee’s awareness that inflation could run below their target; and, if so, would have likely derailed their gradual rate hikes.  As such, the Committee now appears less concerned about inflation running below target.  Neither are they concerned about inflation running exceedingly hot, evidenced by the Statement continuing to note that “market-based measures of inflation compensation remain low.”

Bottom Line: The FOMC is increasingly confident in the inflation outlook.  With the labor market expected to continue tightening beyond what the Committee believes is sustainable longer term, they are likely to continue hiking at every other meeting, including another hike at the upcoming June 12-13 meeting. Fed Funds Futures contracts currently project a 95% likelihood of a 25 bps hike in June.