FOMC Minutes: Patience in light of ‘transitory’ inflation weakness – Standard Chartered

Sonia Meskin, US economist at Standard Chartered, suggest that the FOMC May meeting minutes were largely in line with their expectations: they indicated increased consensus around the interpretation of recent core inflation weakness as temporary, reflected a more upbeat economic outlook from many members in light of easing risks from Europe and China as well as a stronger-than-expected Q1-2019 US GDP print, and emphasised a continued patient policy stance.

Key Quotes

“We interpret the latter to mean that the next FOMC move is as likely to be a rate increase as a rate cut. The hawks’ voice was more prominent in the minutes than the doves’; this means a hike is slightly more likely than a cut.”

“Market reaction in the immediate aftermath of the minutes release appears consistent with this view, though short-term rates continue to indicate that market participants assign a higher probability to rate cuts than rate hikes.”

“In line with the May minutes, Fed officials’ commentary on inflation in recent weeks has indicated that downside risks to inflation expectations are a concern, though insufficient for now to induce a dovish policy stance. Indeed, survey measures of inflation expectations have been broadly stable in recent months, even as longer-dated breakeven rates declined in tandem with lower CPI prints.”

“The bigger challenge for the FOMC will be supporting inflation expectations in the next downturn. Since H2-2014, when the FOMC announced its policy normalisation principles even as survey-based inflation expectations gapped lower, consumer inflation expectations appear to have stabilised at a lower level while expectations from the Survey of Professional Forecasters have rebounded. It is worth emphasising, however, that both remain comfortably above the Fed’s 2% objective.”

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