Beckner: FOMC Minutes Imply June Hike; OK If Inflation Overshoots

– Hint At Coming Communication Changes

Written exclusively for InTouch Capital Markets

23rd May 2018

By Steven K. Beckner

The long-awaited arrival of 2% inflation cheered Federal Reserve policymakers at their May 1-2 Federal Open Market Committee meeting and confirmed their inclination to raise short-term interest rates again “soon” and keep raising them “gradually.”

But FOMC minutes give no indication of any desire to accelerate the rate “normalization” process.

The minutes do hint significant linguistic changes to the FOMC policy statement may be on the way.

Before the FOMC met, the Commerce Department’s price index for personal consumption expenditures (PCE) rose 2% overall and 1.9% on a core basis from a year ago. But far from seeing an inflationary danger sign, “most participants viewed the recent firming in inflation as providing some reassurance that inflation was on a trajectory to achieve the Committee’s symmetric 2% objective on a sustained basis.”

Some officials remained skeptical whether inflation would stay at 2%, worrying the pick-up in prices might prove “transitory” and that inflation expectations remained too low. And the minutes suggest it would be okay with a lot of them if inflation ran hotter for a while: “Some participants noted that inflation was likely to modestly overshoot 2% for a time…., (M)any participants emphasized that, after an extended period of low inflation, the Committee’s longer-run policy objective was to return inflation to its symmetric 2% goal on a sustained basis.”

Unspecified officials are cited saying “a temporary period of inflation modestly above 2% would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.”

Helping curb inflation fears were observations that, despite continued labor market tightening, wage pressures were “moderate” and there was “little evidence of general overheating.”

In keeping the federal funds rate in a target range of 1.5% to 1.75% May 2 after a 25 basis point March hike, the FOMC announced it expected economic conditions to evolve so as to “warrant further gradual increases.” And the minutes strongly point to a June 13 move to 1.75% to 2.0%: “Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation.”

There seems to have been little change in projections since March. “Participants concurred that information received during the inter-meeting period had not materially altered their assessment of the outlook for the economy.”

While the rate trajectory seems not to have budged, there was sentiment for changing FOMC communications in two regards. The minutes say “participants commented on how the Committee’s communications in its post-meeting statement might need to be revised in coming meetings if the economy evolved broadly as expected.”

Since leaving the zero lower bound, the FOMC has said the funds rate was “likely to remain, for some time, below levels that are expected to prevail in the longer run.” However, at the May meeting, “a few participants noted that if increases in the target range for the federal funds rate continued, the federal funds rate could be at or above their estimates of its longer-run normal level before too long.” And “a few observed that the neutral level of the federal funds rate might currently be lower than their estimates of its longer-run level.”

So the minutes say “some” officials thought “it might soon be appropriate to revise the forward-guidance language.”

After six rate hikes, the FOMC reiterated in May that monetary policy “remains accommodative,” but some think that language also needs to go.

Although some Fed officials share private concerns about an inverted yield curve, that is not the predominant view, as the minutes confirm, citing a number of factors, such as a lower term premium, that make the yield curve “a less reliable signal of future economic activity.”