The minutes of the March 17–18 Federal Open Market Committee meeting have an interesting paragraph toward the end that suggests a roadmap for how the FOMC assesses inflation in the context of the appropriate timing to tighten policy:
“… [T]he normalization process could be initiated prior to seeing increases in core price inflation or wage inflation. Further improvement in the labor market, a stabilization of energy prices, and a leveling out of the foreign exchange value of the dollar were all seen as helpful in establishing confidence that inflation would turn up.”
Investors will recall that the Fed removed the word “patient” from its March 18 statement, indicating that a liftoff from the zero bound of interest rates is possible in coming meetings, depending on the data. The language in the minutes points to data the Fed may find particularly “helpful” in determining when inflation will turn up, which will then help pinpoint the path and timing of rate hikes.
We know what the Fed is watching, and it’s a constantly shifting scene: In the period since the March meeting, the U.S. dollar has certainly leveled out, with a modest pullback from the early March highs. Energy prices have not only stabilized but rebounded. And while the recent nonfarm payroll report was much weaker than expected, it was so weak that many are discounting it as an anomaly due to weather and other issues. Higher-frequency data such as jobless claims (which this week posted their lowest readings since 2000) continue to point to further improvement in the labor market.
The Fed tells us it is data-dependent. Economic data is volatile. As the Fed moves closer to liftoff, expect heightened volatility in financial markets.