The economic expansion has advanced from the initial recovery, and the focus is now on metrics the Federal Reserve is looking at to gauge the health of the economy. Since the Fed’s dual mandate is to keep prices stable and maximize employment, we will focus on labor and inflation metrics, keeping in mind the broader economic impact as well. We created a Fed Monitor to track some of the data points that will impact the Fed’s decisions to tighten financial conditions. Additionally, we try to quantify the data and information outside of the dashboard to determine if the Fed is being more dovish than the data, and likely to be more aggressive in the future, or if they are being hawkish relative to the data, and likely to be more conservative in the future.
Kevin Warsh’s first FOMC meeting as Federal Reserve (Fed) chair concluded with rates unchanged at a target range of 3.50%-3.75%. The June post-meeting statement was simplified, and language indicating an “easing bias” was removed. The updated dot plot showed a notable shift in the policy outlook. Nine of the 18 participants who submitted projections now see at least one rate hike this year, compared with no Fed official projecting rate hikes in March. In his post-meeting press conference, Warsh announced five task forces to review areas including the Fed’s communication tools, data sources, and inflation framework. A key message throughout the press conference was that the Fed remains committed to returning inflation to its 2.0% target, and that Fed officials still have some work to do on that front.
The Fed’s dual mandate is to promote maximum employment and price stability. On the employment side, the labor market has shown signs of renewed strength. Payroll growth has averaged 188,000 over the last three months, the strongest pace in more than two years, while jobless claims remain low and the unemployment rate is holding steady at 4.3%. For now, that gives the Fed less reason to focus on potential downside risks in the labor market and more reason to prioritize inflation, which remains above its 2.0% target. Headline CPI inflation has risen to a three-year high of 4.2% year-over-year, with much of the increase driven by higher energy prices. The Fed’s preferred inflation gauge, the core PCE price index, is still running above 3%, and has exceeded 2.0% for more than five years. One silver lining is that wage pressures are easing, which may reduce the risk of broader inflation pressures.
The path forward for the Fed will depend largely on where inflation heads from here. As of this writing, the futures market is assigning a 90% probability of at least one rate hike before year-end, while Treasury yields have risen sharply as markets price in a higher likelihood of tighter Fed policy. We are moving the Fed-O-Meter slightly to the right to reflect the increased odds of a rate hike this year.
