FOMC More Hawkish on Inflation, June Rate Hike a Done Deal

As widely anticipated FOMC left the Fed funds rate target at 1.5-1.75% in May. The accompanying statement also came in largely in line with our expectations – shrugging off moderation in first quarter growth and getting more confident in the inflation outlook. The more hawkish FOMC statement maintained market pricing of 100% chance of a June hike.

On economic developments, policymakers affirmed the ongoing strength in the employment market, noting “job gains have been strong, on average”. They also noted that “business investment continued to grow strongly”. This was compared with the March reference that business investment “moderated from their strong fourth quarter readings”. The members retained the view that the growth of household spending “moderated from its strong fourth-quarter pace”

The major changes came from the reference on inflation. The central bank indicated that “both overall inflation and inflation for items other than food and energy have moved close to +2%”, while in March, they noted that those barometers “have continued to run below +2%”. Meanwhile, the members judged that “Inflation on a 12-month basis is expected to run near the Committee’s symmetric +2% objective over the medium- term”. In March, they expected inflation to “move up in coming months” and “to stabilize around the Committee’s 2% objective over the medium- term”. They viewed the risks are ”roughly balance” in both meetings. Yet, the reference that “the Committee is monitoring inflation developments closely” was removed in May. This evidenced the members growing confidence that inflation would reach the target as expected.

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A rate hike in June appears a done deal. According to CME’s 30-day Fed funds futures, the market has already priced in 95% chance of +25 bps, and 5% chance of +50 bps, increase in the policy rate next month. The updated economic projections and the median dot plot would also be released in the June meeting. The market would be closely watching if the members have raised their rate hike expectations to four times from three. The May meeting has failed to reveal any hint on the issue, though.

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