May FOMC in our view, Firmer Inflation, Stronger Consensus

As widely expected, the FOMC left the funds rate target range unchanged at 1.50-1.75% at its May meeting. The key change in the post-meeting statement was the recognition that headline and core inflation have “moved close to 2 percent,” an upgrade that was widely expected but important nonetheless. We left our subjective odds of a June hike unchanged at 90%.

In addition to the upgrade to the statement, another significant change has taken place since the March meeting: most participants who have recently been on the dovish end have made comments hinting at a shift toward the center. The stronger degree of consensus on the FOMC behind continued gradual hikes adds to our confidence that the FOMC will hike three more times in 2018, for a total of four hikes this year. We also expect four hikes in 2019.

Looking ahead, a key question is when the FOMC will modify its description of the policy stance as “accommodative.” We suggests three views. First, the FOMC never watered down “accommodative,” instead simply waiting to drop it outright. Second, it did so when the funds rate reached 4.25% and crossed into the range of staff estimates of the neutral rate. Third, after dropping “accommodative,” the FOMC’s statement noted that further policy firming might be required, but never characterized the stance of policy as neutral or restrictive.