As expected, the Federal Reserve held the target range for the federal funds rate unchanged. However, there were some notable changes in the language of the statement. Leslie Preston, Senior Economist, TD Bank Group, speaks to Sara D’Elia about noteworthy changes in the Fed’s take on inflation and the expected pace of rate hikes going forward. The TD Economics report is available here.
No change from the Fed today in what's being characterized as a stay-the-course announcement. Here to explain is Leslie Preston from TD Economics. Thanks for being here.
I want to kick things off by asking you what stood out in the statement. And what you characterized in terms of what we saw is that it largely reflected the data. What do you mean by that?
What I mean by that is I don't really think we saw much of a change in the forward-looking language. The changes we did see reflected the data that's come in since the last Fed announcement, things like that it characterizes inflation that has moved close to 2%, whereas they previously said inflation was running slightly below 2%. You know, they talk about household spending in the first quarter coming in weak, which they didn't have that data before. So these aren't necessarily things that are going to affect, to a large degree, the Fed's outlook, but just acknowledging how the data has progressed since the last statement.
In terms of that inflation piece, there's lots of questions around how much of a risk it is that it runs hot? What are you watching there? And do you really think that's a possibility?
We are watching the risk that inflation could heat up more than either we or the Fed are expecting. I think there are a lot of forces out there that could push inflation higher than we expect, more so than we would think pressures that could push it down. You've got potential import tariffs, which raise the cost of imported goods. You've got wage pressures building up in the economy, which could raise inflationary pressures on the services side of the economy. And you have the past strength in the US dollar, which had been holding a lot of imported goods prices down, starting to fall out. You're starting to see some of these imported goods, which are in deflationary territory, either move into inflation or become less deflationary.
So we really have a trio or so of forces conspiring to lift inflation. Do we think that will lift inflation to 3%, 4%? Maybe not. And we certainly have seen in recent years that the relationship between how hot the economy's running and inflationary pressures has weakened. But it is something we're keeping a close eye on.
I want to ask you a little bit about the market reaction because we did see a move, not materially built in stocks or bonds. But why do you think that happened?
I think, given the fact that we did have-- while first quarter GDP data was weaker than the fourth quarter, it was a little stronger than markets were expecting. We also just had the March PCE inflation report come out on Monday, and it was a relatively strong report, still in line with market expectations, but a bit of confirmation that yes, inflation's picking up.
So I think perhaps markets were bracing themselves a bit for a more hawkish statement. How would the Fed characterize the outlook, given the fact that the data has either confirmed their forecasts or perhaps been a little bit hotter than they might have been expecting? It's a pretty marginal difference, so yields on some treasuries were down a bit. But I would say for a Fed that wants to adjust policy gradually, raise rates gradually, and consistent with how the data is evolving, I think this statement is very much in line with that messaging we've already seen from the Fed.
On that gradual move higher, we saw no change today at the May meeting. But coming up in June and throughout the summer, what are your expectations going forward?
Well, we are expecting a 25-basis-point rate increase at the June meeting. And we do expect another rate increase in September. So that makes it three rate increases for 2018 as a whole.
Leslie, thanks for being here. It sounds like you've given us some perspective around future hikes, two more priced in for this year.
Thank you very much for having me.