Fed Holds Rates Steady but Acknowledges Higher Inflation

The U.S. Federal Reserve kept its benchmark interest rate unchanged Wednesday but recognized that inflation is beginning to heat up.

The U.S. central bank’s decision to leave its Fed Funds rate at a target of 1.5 percent to 1.75 percent came as no surprise to investors.

However, the Fed did make a few tweaks and drop a few hints at future moves in its post-meeting statement that investors and traders likely will find instructive. Traders who were looking for the Fed to issue hawkish commentary got more than they had hoped for in the central bank’s monetary statement.

The biggest surprise in the statement was the FOMC’s comment that “overall inflation and inflation for items other than food and energy have moved close to 2 percent.” That was an upgrade from the March meeting in which the FOMC said the indicators “have continued to run below 2 percent.”

The change in the central bank’s rhetoric is very important because 2 percent inflation is the Fed’s mandate and a healthy enough level to warrant more frequent rate hikes.

The committee made one other change to its inflation forecast.

“Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term,” the statement said. In March, the committee projected inflation to “move up in coming months,” so this week’s language indicates more progress toward the inflation goal.

This assessment was supported by this week’s Personal Consumption Expenditures Index which rose to 1.9 percent in March, the highest since February 2017. Additionally, including food and energy prices, the PCE level has already reached 2 percent.

The FOMC did express a few concerns about inflation.

“Market-based measures of inflation compensation remain low.” For example, the pace of wage gains is one concern. Average hourly earnings have remained below 3 percent throughout the economic recovery, most recently hovering around 2.7 percent, even as the unemployment rate has plunged to 4.1 percent. This may be a little confusing to Fed officials because wages should be increasing as employment decreases.

The Fed also acknowledged that their economic forecasts are “roughly balanced” and that its outlook has changed from the “near term” to the “medium term.”

The monetary policy statement also acknowledged that “business fixed investment continued to grow strongly.” In March, the committee said the metric had “moderated” from a strong fourth quarter.

Finally, the FOMC approved the decision to hold rates steady unanimously, though it has publicly disagreed about how aggressive the path forward should be. Multiple officials are scheduled to speak publically on the statement in the coming days.