FOMC’s May Minutes Shows Some Dovish Tweaks

The FOMC minutes for the May meeting contain some dovish signs from the Fed. The members remained confident over the economic developments, acknowledging strong employment market and improvement in inflation. However, many of them remained wary of limited wage pressures. The minutes emphasized “the aim of keeping inflation near its longer run symmetric objective”, suggesting that a certain degree of inflation overshoot would be tolerable. This signals that the rate hike pace might not need to accelerate to catch up with inflation. Meanwhile, the Fed appeared to have confirmed that a June rate hike is in place. Yet, it made no indication on the path after that. This came in contrast with market speculations which have overshot three hikes already. Concerning financial market reactions, US Treasuries rallied, with the 10-year yield falling below 3%. Equities strengthened with the DJIA and S&P 500 indices ending the day higher, up +0.21% and +0.32%, respectively. US dollar pared some of its gains acquired ahead the release of the minutes

There was intensive discussion over the employment market and its impact on wage growth. The members noted that the strength in the labour market was “showing through to a gradual pickup in wage increases, although the signal from other wage measures was less clear”. Many members indicated that “overall wage pressures were still moderate or were strong only in industries and occupations experiencing very tight labor supply”, while “several of them noted that recent wage developments provided little evidence of general overheating in the labor market”. Meanwhile, some foresaw that “supply constraints could develop that would intensify upward wage and price pressures” as resource utilization continued to tighten. At the same time, some “thought that a strengthening labor market could bring a further increase in labor supply, allowing the unemployment rate to decline further with less upward pressure on wages and prices”.

Recent movement in the price levels have assured the members that the downside surprise last year was driven by temporary factors. Indeed, some of them have also viewed the recent strength in inflation as temporary. According to the minutes, “it was also noted that a temporary period of inflation modestly above 2% would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective”. The use of the term “symmetric” appears to remind investors that the Fed is willing to tolerate higher inflation. The minutes also noted that temporary above-target inflation could be “helpful in anchoring longer-run inflation expectations”.

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On the monetary policy stance, the minutes affirmed market expectations that a June rate hike is in place. It noted that “most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation”. However, it stopped short of hinting the pace of normalization would pick up. This could be interpreted as dovish by the market which has priced in more than three rate hikes for the year.

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