Peter: What data the Fed is dependent on is even more cloudy
The Fed acknowledged the slowing of economic growth but said this was in spite of the improving labor market. They added in “households’ real income has risen at a solid rate” which is a good thing but it’s weird that they celebrate this at the same time they are trying to generating higher inflation and thus lower real income. Anyway, on the inflation commentary they took out the comment that “inflation picked up in recent months” just as the CRB index has risen almost 5% since their last meeting (they of course are looking at backward looking data and not actual market prices). The other sentences on inflation were the same as the last meeting, also not acknowledging the rise in inflation expectations in the TIPS market.
In the 2nd paragraph, they completely eliminated this sentence from the March meeting: “global economic and financial developments continue to pose risks.” Likely in response to the stabilized data out of China and Europe.
Esther George was again the lone wolf in wanting to hike rates another 25 bps.
Bottom line, I’m even more confused as to what factors are influencing them. If the sentence above on international developments was the reason why they didn’t hike in March, what is the excuse this time? Is it now slowing growth that they mentioned? Is it “inflation has continued to run below the Committee’s 2% longer run objective”? The labor market has met their mandate and they repeated their view of “strong job gains” which “points to additional strengthening of the labor market” but this apparently is not enough. All I can say again is that the Fed has and continues to wing it and for all the talk about being data dependent, they’ve completely neutered the concept because we no longer know what data they are depending on.
In terms of the market reaction, stocks ripped higher but US Treasuries, both the short and long end, haven’t moved much because the statement wasn’t clear again as to what the Fed is most focused on. The 2 yr yield in particular is unchanged with yesterday. FX had a sharp wiggle right after the release but is back to little changed.