June FOMC meeting: May disinflation welcome

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As widely expected, the Federal Open Market Committee (FOMC) made no change to the target range for interest rates or to balance-sheet policy at its June meeting. Its statement was generally little changed, though the language characterizing progress on inflation in recent months was upgraded. Rather than reading, “There has been a lack of further progress” toward the Committee’s 2% inflation goal, the statement now reads that there has been “modest further progress...”

Summary of Economic Projections shows fewer cuts, higher inflation

The median forecast for the target range in the Summary of Economic Projections, more commonly known as the “dot plot,” showed just one cut in 2024, compared with three in the prior projection. The distribution of forecasts, however, suggests that there might still be scope for a second rate cut this year. Both the forecasts for the target range in 2025 and the longer-run rate moved slightly higher, to 4.1% and 2.8%, respectively.

The Committee’s economic forecasts showed no change to real GDP at any point in the time horizon. The forecast for unemployment was unchanged in 2024 at 4% but moved up 0.1% across all other time horizons, including the longer run. Both headline and core PCE forecasts increased 0.2% for 2024 and 0.1% for 2025 but were unchanged at other time horizons.

Chair Powell is cautiously optimistic and acknowledges discussion of higher r*

During Chair Jerome Powell’s press conference, he welcomed the moderation in inflation data shown in May’s CPI, but stopped short of suggesting that the print gave him confidence in the Committee’s ability to cut rates soon. Powell reiterated that he believes monetary policy is restrictive and is having the Committee’s intended effect on the real economy.

Acknowledging the upward revisions to the longer-run rate of unemployment and the longer-run policy rate, Powell opined that they were the product of ongoing discussion about whether the policy rate is likely to return to pre-COVID levels. This could be interpreted as acknowledgement of the risk that r*, or the neutral rate of policy, has moved up in recent years.

May CPI decelerates prior to the FOMC

CPI data before the FOMC meeting indicated that prices were unchanged month over month and increased 3.3% year over year in May. Core inflation increased slightly more, to 0.2% month over month and 3.4% year over year, but still less than had been expected by forecasting economists and market pricing.

Shelter, which comprises 36% of overall CPI, has remained a material source of inflation, and printed at 0.4% for the fourth month in the row. In contrast, food and goods, which comprise 13% and 19% of overall CPI, respectively, continued to print close to flat on a month-over-month basis. Services ex-shelter were mixed on a line-item basis but trended downward toward the Fed’s 2% target on a net basis.

Employment data sends mixed signals

As inflation data inches closer to the FOMC’s target, data regarding the strength of the labor market has been mixed in recent months, including in the most recent Employment Situation Report (ESR) for May, which printed on June 7. The ESR reflects two surveys: the Establishment Survey, which gauges the experience of businesses, and the Household Survey, which looks at the experience of laborers.

In May, as in recent months, the Establishment Survey, which generates the topline gain in nonfarm payrolls, suggested a strong labor market, and showed an increase of 272,000 jobs. In contrast, the Household Survey showed growing weakness in the labor market, including an uptick in the unemployment rate to 4.0%.

Alternative measures of employment have generally been more in line with the Household Survey and suggest more weakness in the labor market than does the Establishment Survey. These include JOLTS (the Job Openings and Labor Turnover Survey), which has shown declines in job openings and the job quits rate; some surveys of hiring intentions; and alternative measures of wage pressures, including the Atlanta Fed wage tracker and private wage data monitors.