Instant Analysis: FOMC holds interest rates steady in May, signals June increase

Scott Anderson
Posted by Scott Anderson
Chief Economist

The Federal Reserve held the fed funds target rate steady at the May FOMC meeting, as was widely expected. But the language changes in the May statement clearly show a growing confidence that the Fed will be able to hit its 2.0% inflation target on a sustainable basis, and that in the near-term inflation could end up running a bit above the 2.0% target.

View of a eagle statue on Federal Reserve building in DCOn that point, we are currently forecasting CPI inflation of 2.8% y-o-y in the second and third quarter of this year, before consumer inflation starts to moderate back toward its 2.0% trend in 2019.

However, fixed income traders who were expecting the Fed to hit a faster pace of four rate hikes this year will likely be disappointed with today’s statement.

While the FOMC upgraded its assessment of the current and 12-months-ahead inflation environment, the members appear to be comfortable with the gradual approach to raising the fed fund funds rate they laid out in March’s Summary of Economic Projections and Fed funds dot-plot. Our forecast for fed funds rate hikes this year remains unchanged in the wake of today’s FOMC statement. We continue to forecast three fed funds rate hikes this year, with the next one occurring in June.

The FOMC statement mentioned, “On a 12-month basis, overall inflation and inflation for items excluding food and energy had moved close to 2.0%,” compared to the March FOMC statement that said, “Inflation continued to run below 2 percent.”  They also added language that, “On a 12-month basis, inflation is expected to run near the committee’s symmetrical 2.0% objective over the medium term.”

But there was also a nod to a continuation of the current gradual approach to tightening monetary policy coming from today’s statement. The FOMC took out the language from the March statement that the economic outlook had strengthened in recent months, but maintained the language in the policy paragraph that the FOMC still expects economic conditions will evolve in a manner that will warrant further gradual increases in the fed funds rate.  We take that to mean three rate hikes this year remains the median forecast of the committee.

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