As expected at the May FOMC meeting, the U.S. Federal Reserve kept rates unchanged. Michael Dolega, Director and Senior Economist, TD Bank Group, talks to Sara D’Elia about what mattered in the statement and whether a June rate hike is still on the table.
Well, you're right, it did not happen. The markets were looking for some sort of signal or confirmation from the Fed as far as a June rate hike or a near-term rate hike, and that was absent from the statement. I think several things stood out in today's statement. In particular, the Fed appears to be sort of seeing through the weakness in economic activity in the first quarter, instead highlighting the improvement in the labor market.
At the same time, it also-- the Fed suggested that it's comfortable with the headline inflation, or it mentioned that it's close to 2%, where its target is. However, it did highlight some of the issues or concerns regarding the weaker March core inflation numbers that we've seen recently.
So I want to dig in a little bit deeper on that inflation piece, because the immediate reaction, or the media attention, was around that commentary that they're moving close to that 2% target. So it doesn't sound like you're as convinced.
Well, I don't think-- I'm not as convinced, and I think the Fed is not either. The total inflation numbers, the headline number that you mentioned that the markets have reacted to, is really the one that's driven more by oil prices, or at least at this point it's supported by a rebound in oil prices.
However, the underlying details are a little bit more nuanced. There is the core measure of inflation, which typically leads the headline, and it is a good indicator because it's less volatile, has been coming in a little bit weaker. It came in weaker in March, and that's what we've seen highlighted in the statement. So it suggests that the Fed, or the FOMC members, are paying attention.
And there's some sort of concern as far as if it's beginning a new trend. I don't think that's the case, and I don't think the Fed does either, but I think they're looking for confirmation from the data at this point as far as inflation metrics before committing to any near-term hike.
So it sounds like it's a bit of a wait and see game right now, is what I'm gathering. But if they are data-dependent, looking at the market reaction, or the expectation going into the next Federal Reserve meeting, there's about a 70% probability of a hike going into June.
Yeah. And I think that's reasonable. That's kind of along the ballpark of where we see things happening. I think a lot of that is riding, again, on the data.
I think both the markets and the Fed expects things to rebound. They're seeing through the Q1 weakness, which has been-- the economy slowed in the first quarter. So again, all of this is-- all eyes on data at this point, and there's an anticipation that that data is going to be coming in much stronger going forward, as Q2 numbers begin rolling in.
Assuming June happens, how many more rate hikes do you think we could see through 2017?
Well, I think two more-- sorry, I guess June and then one more later that year, or later this year, is entirely plausible, again, if the data cooperates. At this point, unemployment is very low. Inflation is really the sticking point at this point for the Fed, and that's kind of what they're going to be looking at going forward. But given the underlying fundamentals, which do remain quite good, and if inflation does begin to sort of trend higher towards the 2% target, I think the Fed is going to be comfortable enough to raise twice this year, with some potential-- and rolling out a plan potentially to highlight, or to outline how to reduce the balance sheet.
Thank you very much, Michael.
Thank you very much for having me.