As widely expected, the Federal Open Market Committee (FOMC) left the target range for the federal funds rate unchanged at between 3/4 and 1 percent.
The Committee was fairly upbeat indicating that the labor market "continued to strengthen" with job gains solid "on average" and unemployment having declined, even as growth in economic activity "slowed."
The statement highlighted consumer spending "rose only modestly" but indicated that the Committee believes that "fundamentals underpinning … consumption remained solid." Moreover, the Committee viewed business investment as having "firmed," dropping the "somewhat" qualifier used in the March statement.
Inflation was viewed as "running close to the … longer-run objective," while the core measure was flagged as having "declined in March" and running "somewhat below 2 percent."
The decision was unanimous, with Kashkari (FRB Minneapolis) voting alongside the remaining Committee members given the status-quo decision.
Key Implications
This was largely a status-quo statement that highlighted the continued labor market improvement, while seeing through the deceleration in economic activity during the first-quarter. This was expected and is reasonable given the transitory effects which slowed growth during the quarter, including the inventory cycle and the warmer weather. In particular, the slowdown in consumption was played down, with an acceleration expected given solid supporting fundamentals.
The weak March inflation numbers were also highlighted, suggesting the slowdown in the metric was not taken lightly, particularly in light of low measures of inflation compensation. Still, the monthly pullback is unlikely to sway the Fed unless the weakness persists, something that we don’t anticipate.
At this point, we expect the Fed to be in wait-and-see mode in the coming weeks, as second quarter data begins to trickle in. Should figures over the coming weeks confirm a rebound in consumer spending and inflation, we expect the Fed raise rates in June. Still, this is far from a done deal, and potential weakness could delay any hike further into the year.
