FOMC Leaves Rate Unchanged: Leans Hawkish On Inflation, Dovish On Growth

With little expectation for a rate-hike today (66% chance of no change), market participants are scouring every word and nuance for signals that The Fed is more (or less) worried about inflation (PCE hit 2% on Monday) and may hike faster (or slower); and whether recent economic weakness is merely "transitory" or reflexively driven by The Fed's tightening actually impacting financial conditions.

The key highlights:

  • RATES UNCHANGED, DECISION UNANIMOUS
  • INFLATION HAS "MOVED CLOSE TO 2%" TARGET
  • FED SEES INFLATION RUNNING NEAR 'SYMMETRIC' GOAL MEDIUM TERM
  • ECONOMIC OUTLOOK MODESTLY DOWNGRADED

The addition of the "Symmetric" language traditionally has indicated that the Fed is willing to overshoot on the upside with inflation, hence the hawkish tilt on inflation. The Fed also removed the line about "monitoring inflation developments closely" as it reaches its 2% inflation target.

On the other hand, the Fed completely removed the following sentence:

  • "The economic outlook has strengthened in recent months."

Suggesting a dovish tilt on the economy, especially when combined with the Fed outlook on inflation compensation which it sees as "remain low" compared to March when it had "increased in recent months."

Summarizing the key takeaways from FOMC lockup:

  • No rate change, as expected, vote unanimous
  • Change in inflation language: "On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent"
  • FOMC statement now twice uses the word `symmetric' to describe its inflation objective, emphasizing they view a persistent overshoot the same way that they view a persistent undershoot
  • Removal of the following language in its entirety: "The economic outlook has strengthened in recent months"
  • "Risks to the economic outlook appear roughly balanced" instead of "Near-term risks"

So it seems the Fed is hawkishly monitoring rising inflation and dovishly aware of a slowdown in the economy's growth.

There is no press conference today.

The full March-May statement redlined comparison is below:

*  *  *

Expectations ahead of today's FOMC statement show an almost even odds of 2 more or 3 more rate hikes in 2018...

 

Since The Fed hiked rates in March, stocks, bonds, and gold are lower as the dollar has soared 3%, oil is up almost 4% and 2Y yields are up 20bps...

 

US Macro data has disappointed consistently since The Fed hiked in December...