May FOMC Decision

To no one’s surprise, the FOMC left its target range for the federal funds rate constant at 1.5 to 1.75%. This decision maintains the Committee’s record of no rate hikes at meetings where no SEP forecasts were available and also spaces out its gradual normalization of policy. There is virtually no information in the statement released on Wednesday that hints at why rates were held constant. The May statement was virtually identical to the March statement when the policy range was increased by 25 basis points.

Parsing the two statements, we find that only a few words are different. First, in describing growth the March statement said that “job gains have been strong in recent months,” whereas the May statement inserted the words “on average” following the word strong, no doubt bowing to the fact that the March job gain number was only 130K (revised up after the meeting to 134K), following February’s 326K (revised down after the meeting to 324K). Second, the May statement noted a reversal in business investment, stating that “business fixed investment continued to grow strongly,” in contrast to the March release commented that “business fixed investment moderated from fourth quarter readings.” Third, the committee observed that inflation had now moved closer to its 2% target, while the March statement said that inflation was running below target. In total, these wording adjustments were simply slight modifications recognizing marginal changes in the economy while reaffirming all the previous language about the future gradual path for policy and what evidence would prompt policy changes.

In the wake of this statement, pundits and economic commentators immediately began to speculate that the next rate hike will come in June. But there are reasons to believe that a June move might be premature, given that little new relevant information will be available on key components of the economy’s performance. The only new information about GDP will be the second estimate on Q1 2018, which will be supplemented by Beige Book information. This latter source has suggested that growth is (at best) moderate; and should that trend persist, it will be hard to justify concern that the economy may be overheating. In June there will be two numbers on job creation and several weeks of unemployment statistics. Given the variability of the CES employment data, it is unlikely that an observable trend will have appeared, unless there are more numbers like March’s. Indeed, today’s release for April showed that 164K new jobs were added, much below the 200 plus number that “informed” economists were expecting. Finally, the FOMC will have only one more observation on PCE. Given that the 2% target was hit for a couple of months in January and February of 2017 before it declined back to a low of 1.4% for several months that fall, there can be little assurance that even another month at 2% will be sufficient to cause the FOMC to act, especially with the large number of vacancies on the Board and the relative lack of experience of the majority of the current voting members of the FOMC.