Fed notes sounding steady on inflation

WASHINGTON -- Federal Reserve officials gave no indication that they are likely to speed up their pace of interest rate increases during their most recent two-day meeting, suggesting instead that they would be willing to allow the inflation rate to rise slightly above 2 percent for a "temporary period," while the economy continues to expand.

Minutes from the meeting, which ended May 2 and are released after a typical three-week delay, reveal Fed officials are on track to raise rates again in June. The minutes also indicate officials are less worried about inflation rising above 2 percent, its current level and the Fed's target rate, than they are about the rate of inflation dipping again.

Officials continue to see the economy as strong, but they remain worried about global trade tensions, including potential damage from American and Chinese tariffs and the possibility that uncertainty over trade policy could already be crimping business investment in the United States.

Officials at the Federal Open Market Committee concluded the May 2 meeting with a unanimous decision to leave the Fed's benchmark interest rate unchanged at its current level, a range from 1.5 to 1.75 percent. The Fed last raised interest rates in March, by a quarter of a percentage point. It is widely expected to raise them by the same amount at its next meeting in June.

The minutes from the May meeting reported that officials said recent economic indicators "had increased their confidence that inflation on a 12-month basis would continue to run near the Committee's longer-run 2 percent symmetric objective." But the minutes noted that some officials believed "it was premature to conclude that inflation would remain at levels around 2 percent, especially after several years in which inflation had persistently run below the Committee's 2 percent objective."

Some officials noted, the minutes added, that "a temporary period of inflation modestly above 2 percent would be consistent with the Committee's symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective."

As if to drive home the point, the minutes use the word "symmetric" nine times in reference to inflation. Two additional references are found in the statement they released after the May meeting, which noted that annual inflation "is expected to run near the committee's symmetric 2 percent objective over the medium term." Analysts have largely seen the inclusion of "symmetric" as an indication that Fed officials would be willing to tolerate inflation running slightly above target for a period of time. Researchers at Morgan Stanley said this week that in reading the minutes, they would "pay careful attention to the discussion behind the upgraded language" on inflation.

The emphasis on "symmetric" -- and the policy stance it signals -- is likely to cheer economic advisers in the White House, who have long insisted that the $1.5 trillion tax cut package President Donald Trump signed into law late last year will increase economic growth without stoking higher inflation. Many analysts expect that an acceleration in the pace of rate increases would dampen growth and potentially offset some of the stimulus from the cuts and from the federal discretionary spending increases that Trump and congressional leaders agreed to earlier this year.

The policy decision at the May meeting was widely seen as an affirmation by Fed officials that they will stay the course on their plans to increase rates to historically normal levels, after leaving them near zero for years after the latest recession. The minutes seem to affirm that Fed officials are not wavering in that approach -- though they report officials expressing "a range of views" on the amount of rate increases that will be needed to maintain the Fed's policy objectives in the medium term.

Economic projections released after the Fed's March meeting suggest officials expected to raise rates two more times in the months to come, for a total of three increases this year. Nearly half the officials indicated they expect one additional increase on top of that, for a total of four in 2018. Many economists continue to forecast a total of four hikes this year, as well.

Business on 05/24/2018

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