Inflation has finally reached the Fed’s target
Data released on Monday showed that wages and prices are now growing at 2 percent a year, according to the Fed’s preferred inflation measure, the personal consumption expenditures price index. Excluding volatile food and energy prices, the rate is 1.9 percent. Those levels are important because they indicate inflation is finally reaching the 2 percent level that the Fed has explicitly targeted, after six years of failing to meet that goal.
Officials acknowledged that increase on Wednesday, in a change from the March meeting statement, which declared inflation and core inflation rates “have continued to run below 2 percent” and that annual inflation is “expected to move up in coming months” and stabilize around 2 percent.
But the statement released on Wednesday showed no signs of alarm, as of yet, over rising inflation. Officials said that annual inflation “is expected to run near the Committee’s symmetric 2 percent objective over the medium term.” They eliminated a line from the March statement that declared “the Committee is monitoring inflation developments closely.”
Several Fed officials have raised concerns in recent weeks about the economy “overheating” and pondered whether the Fed may need to pour some cold water on the economy with higher interest rates. The concern is that if the Fed does not raise interest rates quickly enough, wages and prices could begin to spiral up, forcing a sharp rate increase that could push the economy into recession.
If such a situation arises, “it’s very hard to navigate that without having an economic downturn,” Eric Rosengren, the president of the Federal Reserve Bank of Boston, said in an interview last month. “My concern is that’s much worse than just having slightly slower growth” from a slightly faster pace of rate increases.
Diane Swonk, chief economist at Grant Thornton, said in a research note this week that “the recent firming in inflation validates the Fed’s assumption that the slowdown in inflation last year was transitory.”
“The Employment Cost Index picked up during the first quarter,” she said, “another sign that the economy is delivering the warming trend in wages and inflation” that the Fed has been watching for.
No sign of economic growth concerns
The chairman of the Fed, Jerome H. Powell, and other officials are broadly optimistic about the strength of the economy but have noted some risks on the horizon for growth — most notably a potential drag from a trade dispute with other nations. Some economists have also raised early concerns about slowing growth in Europe, which could affect the United States, and about other market metrics that could portend a slowdown, such as the rise in Treasury bond yields.
There were few hints of those concerns in this meeting’s statement.
The statement declared that “business fixed investment continued to grow strongly” since the last Fed meeting, which was more bullish language than the March statement. It noted, as it did in March, that household spending growth had moderated since the end of last year. It eliminated a line from the March statement that declared “the economic outlook has strengthened in recent months,” but did not add any new language about risks to growth.
Officials said “risks to the economic outlook appear roughly balanced,” a slight change from March, when they declared “near-term risks” appeared roughly balanced.
In a research note this week, Krishna Guha of Evercore ISI said the statement would most likely lend “no support” to the idea that growth concerns could lead officials to slow the pace of rate increases in the months to come.
“We think the F.O.M.C. will retain the basic assessment that the economic outlook has strengthened in recent months, though this could be rephrased, for instance, to say the outlook remains solid,” Mr. Guha wrote. “And we think it will repeat the mantra that ‘further gradual adjustments in the stance of monetary policy’ will be warranted.”
A ‘stay the course’ statement
The language in the statement, and the decision on rates, validated Fed watchers who had predicted few changes this month. In part, that’s because there haven’t been significant surprises in economic data since the last meeting — everything is more or less continuing to unfold as officials envisioned.
“We do not expect any major changes to the policy statement other than to mark the language to the incoming data,” analysts at Bank of America Merrill Lynch wrote this week. “We expect the committee to reaffirm their outlook for the economy and the path of policy from the previous statement, setting up the committee for a rate hike at the June meeting.”
News credit : Nytimes