FOMC Monetary Policy May 2018: Assessing future bias from statement

As expected, the policymakers at FOMC made no changes to the monetary policy at yesterday’s meeting. Current Federal funds rate target 150-175 basis points.

Let’s first assess the bias in monetary policy statement –

• Improvement in the labor market continues to strengthen, economic activity rising at a moderate rate. (Neutral bias)
• Job gains have been strong in recent months, and the unemployment rate has stayed low. (Neutral bias)
• Growth rates of household spending have moderated from their strong fourth-quarter readings. (Neutral bias)
• Business fixed investments growing strongly. (Mild hawkish bias)
• Inflation both including and excluding energy and food, consumer prices moved close to 2 percent. The market-based measure of inflation compensation low. Survey-based inflation measure little changed on balance. (Mild hawkish bias)
• FOMC expects gradual policy adjustments and expects further strengthening in the labor market and moderate expansion in the economy. Inflation on a 12-month basis is expected to run close to the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced. (Mild hawkish bias)
• Fed is closely monitoring the global economic and financial developments as well as measures of inflation. (Neutral bias)
• The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate and the rate to remain below longer-run levels. (Neutral bias)

Three points to note; the statement is more hawkish in nature, Fed heightened its hawkish outlook for inflation and Fed expressing concerns over household spending.

On balance, the policy was hawkishly tilted and there is no reason to doubt that the FOMC will follow through its interest rate forecast.