Some members doubt inflation will stay above 2%
The FOMC’s May meeting minutes indicated that some of its members had turned bearish on inflation (TIP). Some members are reported to have said that “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.”
This information played a major role in changing investor’s assessment of the Fed’s plan for future rate hikes. If members feel that inflation can’t sustain above 2%, there’s the chance that they could limit the number of rate hikes going forward.
As per the minutes, survey-based estimates of long-run inflation expectations were unchanged, and consumer price inflation was near the 2% target. Core personal consumption expenditure price inflation was reported to have increased 1.9% in the last 12 months, while the consumer price index had increased 2.4% over the same period.
Inflation and oil prices
Rising oil (USO) prices in recent months were said to have had an impact on inflation (VTIP), which led to an increase in the yields of Treasury Inflation-Protected Securities. This rise led to a slight upward revision of near-term inflation (SCHP) projections, but long-term projections were slightly lower than the previous forecast. The reason for this decline in long-term projections is that FOMC members expect energy (XLE) prices to fall in 2019 and 2020.
Incoming data to influence the Fed
Overall, the FOMC May meeting minutes gave little insight as to whether there would be a fourth rate hike in 2018. Though a hike isn’t completely off the table, the incoming data should be watched closely from now on.
If inflation remains above 2%, hopes for an additional rate hike will remain alive. The next FOMC meeting is on June 12–13, and a rate hike at this meeting has been completely priced in.