The Federal Reserve's curious consensus: Morning Brief

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The Federal Reserve’s announcement on Wednesday was one of the more unique developments in central banking that investors are liable to see.

Interest rates were held steady in a range that is the highest in 16 years, but two additional rate hikes were forecasted for the balance of the year.

All while Fed Chair Jay Powell said during a press conference “no decisions” have been made about future meetings while slipping, at one point, and catching himself when referring to Wednesday’s pause in rate hikes as a “skip.” Powell later reiterated that future decisions would be data dependent.

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The Fed’s economic forecasts — in addition to suggesting two more rate hikes will be needed this year — also saw significant revisions to expectations around economic growth (stronger), unemployment (lower), and inflation (higher) when compared to March.

Amid all these moving parts and what was, all things considered, a nuanced move with a tough sell to markets, the Fed’s move on Wednesday found no dissents among the 12 Fed officials that voted for the policy.

Notable, in our view, given that if there were ever a time for officials to make their disagreement known without having to spend much political capital to do so, this meeting would’ve been the time.

Writing in a note to clients on Wednesday, Ryan Sweet, chief US economist at Oxford Economics, said the lack of dissents was “a little surprising.” And in Sweet’s view, Wednesday’s announcement was a “bluff” by the Fed.

“Odds are that this is a bluff as inflation is going to continue to weaken in the second half of this year and into next,” Sweet said.

Asked by The Wall Street Journal’s Nick Timiraos on Wednesday why the Fed would pause now while forecasting two hikes later, Powell said the speed of rate hikes is less important than the destination.

Should inflation remain high, more rate hikes will be needed. How fast those rate hikes are needed, in Powell’s view, matters less than it did a year ago, when the Fed raised rates 0.75% at four straight meetings.

Looking at “core” PCE inflation — the Fed’s preferred measure — Powell said Wednesday he is “just not seeing a lot of progress.”

In April, “core” PCE inflation showed prices rose 4.7% over the prior year; the Fed targets 2% inflation.

So while inflation as measured by the Consumer Price Index (CPI) this week showed a two-year low in pricing pressures, there remains some stubbornness on various measures of inflation that remove components like food, energy, or housing.

All of these different ways of cutting inflation might seem like staring too closely at the sun. For many consumers, increases in the cost of things they buy or services they use regularly are either too high or too low.

But the Fed’s goal here is aligned with this base desire from consumers. As Powell said Wednesday: “We want to see [inflation] moving down decisively.” And decisive does not mean that some outstanding “supercore” or “trimmed mean” measures of inflation are still in question.

When the Fed’s goals are laid out this way, then, perhaps unanimity is to be expected.

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