FOMC holds rates; analysts say inflation not a problem … yet

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The Federal Open Market Committee held the fed funds rate target at a range of 1.5% to 1.75%.

The post-meeting statement tweaked its language on inflation to note year-over-year inflation “is expected to run near the Committee's symmetric 2% objective over the medium term."

The Fed removed the phrase that it is "monitoring inflation developments closely."

“The pathway for rates, however, is far from certain,” Stifel Chief Economist Lindsey Piegza wrote in a note prior to the meeting. “There are a number of sizable barriers including modest growth, a flatter curve and a changing composition of Fed leadership that could undermine the Committee’s presumed eagerness to increase Fed funds twice more in the remaining eight months of the year.”

A decline in consumer spending in the first quarter could derail economic growth in the consumer-oriented economy, she said.

“To be fair, the U.S. economy has historically experienced weaker growth at the start of a new year as consumers front-load spending into Q4 amid the holiday season,” Piegza wrote. “Tax reform, however, was expected to mitigate that typical pattern. What we saw instead was consumers spending in anticipation of a possible bump in after-tax take-home pay, an increase which for many failed to materialize into a meaningful increase in income and thus, offered minimal support to Q1 consumption.”

The decision to hold rates was widely expected.

“Overall, we do not expect the upcoming meeting to change market pricing or perceptions of what the Fed is likely to deliver,” BNP Paribas Chief Market Economist Paul Mortimer-Lee said in a statement before the meeting. “The minutes should be more interesting because the Fed is entering challenging territory with policy still accommodative but targets likely to be soon achieved or surpassed.

He said the low fed funds rate target leaves central banks little room in the next downturn. “It is only a matter of time until the next recession comes and a question of what shock will prompt it. But when it arrives, there will be severe policy challenges facing the world’s major central banks.”

And Fed participants have discussed tolerance for an overshoot on inflation, not that numbers are near its 2% target. Morgan Stanley Economist Ellen Zentner wrote in a research paper the Fed isn’t worried about an inflation overshoot just yet because inflationary pressures are not yet broad-based and “trend productivity plus inflation suggests the current pace of nominal wage growth is not inflationary.”

Gary Pzegeo, head of fixed income at CIBC Atlantic Trust Private Wealth Management, in a Bond Buyer podcast, said at this meeting the Fed could be “getting the new team together” and determining roles. Discussions of moving to a dynamic inflation targeting model could occur in later meetings, he said.

After the announcement, Brian Coulton, Fitch's chief economist, said, "The rise in inflation looks to be about more than just base effects and, with the labor market this tight, will be hard for the Fed to ignore. We see three more hikes this year."

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Monetary policy Federal Reserve FOMC