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The minutes from the May Federal Open Market Committee (FOMC) meeting shed more doubt than answers as to the next move from the Federal Reserve. The decision to raise the benchmark lending rate another 25 basis points in early May came at a time when Fed officials were split about the need for further tightening. The committee agreed that inflation was unacceptably high, but expressed concerns about the impact both the debt ceiling issue and the current stress in the banking industry could have on the economy. The minutes summed up the split like this:
- “Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary.”
- “Some participants commented that, based on their expectations that progress in returning inflation to 2% could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings.”
Almost all officials agreed that with the labor market remaining tight, the upside risk to inflation remains the key issue for setting monetary policy. There was much discussion during the two-day meeting about how to telegraph the May rate hike as well as what the next moves might be. Policymakers were intent on communicating a data-dependent approach. “Some” officials wanted to make sure the official press release statement would not be interpreted as signaling either a forthcoming rate cut or rule out further hikes. In other words, be as vague as possible but lean toward flexibility. The message has since morphed into a market-led debate if the Fed should pause or skip raising rates in June and what exactly either would infer.
Market traders are betting more heavily now on a rate hike within the next two FOMC meetings than they were earlier in the month. The odds for a 25-basis point rate increase at the June 14 meeting are over 50%, which would put the Target Federal Funds Rate Upper Limit at 5.5%. Odds for a rate cut have shifted to September, despite the Fed saying there is no chance for a cut this year.
Key Indicators this Week
Inflation – Rising inflation is back on the table and solidly at the top of the Fed’s “to-do” list. Core personal consumption expenditures (PCE), the Fed’s preferred inflation indicator, rose 4.7% in April after two months of decline. The new data goes against recent CPI and PPI reports that suggested inflation was under control. In fact, all levels of the PCE index, headline and core, as well as monthly and year-over-year, were higher than the previous readings. Higher levels of monthly income (up 0.4%) and spending (up 0.8%) are adding to the inflation problem, or rather, not helping bring it down. The rise in incomes was driven by employee compensation and interest income.
GDP – The U.S. economy fared better in the first quarter of the year than previously estimated. GDP was revised from 1.1% to 1.3%, due mainly to stronger personal spending. Consumption increased 3.8%, the strongest pace since the second quarter of 2021. While the report is a look back in time, the data once again shows that the consumer remains resilient and is keeping the economy above water, despite rising prices.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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