FOMC Confident on Inflation Outlook; June Hike Likely
by Craig Dismuke, Dudley Carter
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.
FOMC Official Statement
May 2, 2018
Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.