Daily Commentary BY THE CURVE TEAM –

FOMC Hold Course

3rd of May, 2018

The latest Fed meeting has come and gone and while there was no material expectation of a move in the Fed Funds Rate, the accompanying statement was worth a closer look.

With no press conference or update to the dot plot, there was no move expected by the FOMC when they met to discuss monetary policy overnight. With the market still tilting towards three more hikes this year, we were eagerly awaiting the statement for signs for a more hawkish tilt.

While there wasn’t a clear increase in hawkishness to the statement to suggest 3 more hikes is a lock, the commentary around inflation made for interesting reading. In the opening paragraph, the statement said that “On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent.”

This is a slight deviation from previous commentary, which continually pointed to inflation running below the Fed’s 2% target level. What was interesting is a word that was twice mentioned.

When referring to the outlook for inflation, the statement said that “Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term.” In assessing the outlook in terms of its impact on the setting of monetary policy, the statement added “The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.”

The addition of the word symmetric has many debating what it means for the policy outlook once inflation moves through the 2% target.

Ultimately what the statement does confirm is that the policy divergence that has been developing over the past few months is set to continue. There is nothing to suggest that the Fed will not continue to move forward as planned with at least two, possibly three, more hikes over the remainder of the year.

David Flanagan

Director - Interest Rate Markets