With little in the recent economic data to warrant a change in the U.S. outlook and bond markets that were largely aligned with the Federal Reserve’s 2018 rate hike projections, today’s statement from the FOMC (Federal Open Market Committee) needed only to reaffirm the messages conveyed at the March meeting. We think this was achieved. The statement emphasized the symmetry of the Fed’s 2% inflation target and indicated that the Fed’s baseline outlook remains for two or three additional interest rate hikes in 2018. Market expectations and PIMCO’s forecast align with that trajectory, and the statement garnered little market reaction.
First quarter growth moderation does not change the outlook
Modest wording changes in today’s Fed statement versus the March statement acknowledge the recent data but don’t indicate a shift in the committee’s outlook. Economic data moderated somewhat in the first quarter, but on balance, the incoming data since the March FOMC meeting did not materially change our economic outlook. Weaker consumption in the early part of the first quarter appeared to rebound in March, while business investment growth was boosted by an acceleration in energy investment. Meanwhile, notwithstanding the weak payrolls gains in March, labor market data have been robust on net.
Accelerating inflation – and a modest overshoot will be tolerated
The statement also reinforced the message that the Fed views 2% as a symmetric inflation target, and is willing to tolerate a path of inflation that, for a time, modestly overshoots. (Recall that the Fed’s preferred measure of inflation is core personal consumption expenditures, or PCE.) However, the recent acceleration in core PCE inflation to 1.9% – much closer to the Fed’s target – is not a cause for a faster pace of rate hikes. The acceleration was largely anticipated by us and by central bankers, as the temporary factors that depressed inflation last year have largely faded. That said, inflation and inflation expectations are reverberating in both bond and equity markets.
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Tiffany Wilding is a PIMCO economist focusing on the U.S. and is a regular contributor to the PIMCO Blog.