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Fed holds rates steady but points to higher inflation … CNBC May 02, 2018 at 07:10PM

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Fed holds rates steady but points to higher inflation … CNBC

 

Fed holds rates steady but points to higher inflation

  • The Federal Open Market Committee held the funds rate at a target of 1.5 percent to 1.75 percent, as expected.

  • The committee noted that “overall inflation and inflation for items other than food and energy have moved close to 2 percent.”

  • The Fed also noted some improvements in the economy, saying, “business fixed investment continued to grow strongly.”

Jeff Cox

The Federal Reserve kept its benchmark interest rate unchanged Wednesday but acknowledged that inflation is beginning to creep higher.

In a widely expected move, the central bank’s Federal Open Market Committee held the funds rate at a target of 1.5 percent to 1.75 percent.

However, there were several tweaks to the post-meeting statement that market participants likely will find instructive. Markets already were anticipating that the Fed would move to a more aggressive posture this
year got more to chew on.

Perhaps most significantly, the committee noted that “overall inflation and inflation for items other than food and energy have moved close to 2 percent.” That was an upgrade from the March meeting in which the
FOMC said the indicators “have continued to run below 2 percent.”

The change is key as Fed officials consider 2 percent to be a healthy level of inflation and a key for continuing to push rates higher.

Markets have been watching the central bank for clues as to how aggressive it will be this year. Expectations heading into the meeting were for a total of three rate hikes, with a fourth given a nearly 50 percent
chance.

The committee made one other change to its inflation forecast.

“Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term,” the statement said. In March, the committee projected inflation to “move up in coming
months,” so this week’s language indicates more progress towards the inflation goal.

The observation comes as the Fed’s critical data point, the core personal consumption expenditures index, moved up to 1.9 percent in March, the highest since February 2017. Including food and energy prices, the
PCE level rose 2 percent.

However, officials did hedge a bit regarding inflation.

“Market-based measures of inflation compensation remain low,” a nod to the continued plodding pace of wage gains that have bedeviled policymakers since the Fed adopted its ultra-accommodative stance during the
financial crisis in 2008.

Average hourly earnings have remained below 3 percent throughout the economic recovery, most recently registering around 2.7 percent, even as the unemployment rate has plunged to 4.1 percent. An economic model
called the Phillips Curve to which Fed officials adhere indicates that wage pressures should increase as unemployment decreases, but that has not been the case yet.

Fed officials did note some improvements in the economy.

In particular, the statement pointed out that “business fixed investment continued to grow strongly.” In March, the committee said the metric had moderated” from a strong fourth-quarter.

In describing risks to their economic forecasts, which are “roughly balanced,” officials changed the outlook from the “near term” to the medium term.”

Corporate earnings, which have been robust from the first quarter, have indicated companies expect to increase fixed investment by more than 20 percent.

Profits likely rose more than 23 percent in the first three months and are expected to continue to climb through the year. The stock market has reacted little, though, with most of the major averages hovering
around unchanged for the year.

The economic picture overall is beginning to brighten. Though GDP rose just 2.3 percent in the first quarter, economists foresee a significant pickup through the year.

The Atlanta Fed is projecting second-quarter growth of 4.1 percent, and the New York Fed predicts that first-quarter growth could get revised higher in subsequent readings.

The committee approved the decision to hold rates steady unanimously, though they’ve publicly disagreed about how aggressive the path forward should be. Multiple officials are scheduled to speak publicly in the
coming days.

 

Read More: Fed holds rates steady but points to higher inflation … CNBC

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