Fed Sees Inflation Data Supporting Holding Pattern

CPI data came in slightly below expectations, on balance. Every month, both the headline and core measures came in slightly soft. Core CPI on a 12-month basis is now 2.0%. On the component level, the core measure was supported in part by strength in the shelter (imputed rent), which offset weakness in other components such as apparel (which Powell cited at the May FOMC as a source of transient weakness in core  PCE). PPI data also came in on the softer side, although as a gauge for PCE inflation it is much more indirect.  Final-demand PPI on a 12-month basis was only 2.2%, more than a full percentage point less than what it was in summer 2018. The core measure was at 2.4%. Recall that 12-month headline PCE inflation in March was 1.5%, with the core measure at 1.6%. Fed policymakers would interpret these data as supporting  Powell’s argument that inflation is merely being held down by “transitory factors.”  

Policymaker Remarks 

The trade tensions between the U.S. and China showed incipient signs of affecting Fed policy. Bostic (May  10) noted the possible need for a “different calculus” if the recent escalation of trade tariffs on imports from  China persists. He suggested (May 9) that the continued absorption of higher tariffs by intermediaries was not sustainable, and ultimately higher costs would have to pass on to consumer prices: “Today in the tariff space much of the increase in costs has not been passed on to the final consumer. There is a concern voiced  by the business leaders I have talked to that says if we go to 25% on a broader set of goods, you are going  to start to see that passed through into the consumer space.’’ He noted, “I actually think we are almost to the cusp where we are going to see prices move. We are starting to see signs of that.” 

Nonetheless, policymakers adhered closely to the consensus “patience” message. Like Powell, several policymakers (Williams, Bostic, Kaplan) cited the robustness of trimmed-mean inflation staying near 2%.  Kaplan (May 6) decomposed inflation into its cyclical and non-cyclical components and agreed with Powell  that “some of the drops are transitory.” He saw the impetus of weakened inflation as structural, which  “means inflation’s not running away from us, it also in my view is not as susceptible –- the structural forces  are not as susceptible – – to monetary policy.” As such: “I’m not inclined at this point to lower the Fed funds rate to address it, and I’m not sure lowering the Fed funds rate, I think that’s more effective dealing with the cyclical elements of inflation.” Harker (May 6) thought “some” of the softness was transient. Williams (May  10) saw “inflation a little low but still close.” He noted that “so far,” recent inflation weakness “appears  mostly to reflect normal volatility in inflation statistics.” His criterion for a policy response was a “persistent”  shift. In general, they also remained cautious about inflation expectations. Bostic thought that the FOMC was not “close to” any policy response to weaker inflation or inflation expectations.  

As for GDP, they seemed hopeful for moderate growth, albeit a step down from 2018. Williams anticipated  2.25% for the year. A few policymakers also cited the labor share of income as informing their views on growth. Brainard (May 10) noted that “the long-term decline in the share of national income going to wage  earners is concerning” and warned that “An economy that delivers an increasing share of income gains to  high-wealth households could result in less growth in consumer demand than one in which the gains are  distributed more equally.” Kashkari (May 10) argued that ample labor slack still exists, citing his estimate that  

3.5% wage inflation (vs. around 3% currently) would signify maximum employment. He thought that “If a  tight labor market and strong economy cause this [decrasing labor share] trend to reverse, that would provide  room for even faster wage growth without inflation.” 

There was less news on the framework review than in previous weeks. Brainard’s speech (May 8) was notable for revealing her openness toward yield curve targeting. In contrast, she was a bit more circumspect about supporting numerous makeup strategies the average-inflation targeting framework (Williams, Daly among others) or nominal GDP targeting (Bullard) have put forward. Quarles (May 7) implied that there was a high hurdle for change, arguing that minor deviations from 2% inflation (such as 1.8% for instance) were not that material: He “would not undergo heroic efforts — including rethinking our monetary policy framework, or significant monetary policy stimulus — to edge 1.8 up to two. I just don’t think that level of heroism is necessary. If we were at 1 forever you would have a different issue.” Evans (May 6) reiterated the need for the Fed to establish its credibility in fulfilling the mandate in its current framework (symmetric inflation target)  before any new framework could even be effective.  

Nowcasts (2019:Q2) 

Source Current One Week Ago
Atlanta Fed GDPNow 1.6% 1.7%
New York Fed Staff Nowcast 2.2% 2.1%
CNBC/Moody’s Survey 2.0% 2.0%

Recent Data

Release Period Actual Consensus Revision to Previous  ReleasePreviously Released  Figure
PPI Final Demand MoM Apr 0.20% 0.30% — 0.60%
PPI Ex Food and Energy  MoMApr 0.10% 0.20% — 0.30%
PPI Final Demand YoY Apr 2.20% 2.30% — 2.20%
PPI Ex Food and Energy  YoYApr 2.40% 2.50% — 2.40%
Trade Balance Mar -$50.0b -$50.1b -$49.3b -$49.4b
Wholesale Inventories  MoMMar F -0.10% 0.00% — 0.00%
CPI MoM Apr 0.30% 0.40% — 0.40%
CPI Ex Food and Energy  MoMApr 0.10% 0.20% — 0.10%
CPI YoY Apr 2.00% 2.10% — 1.90%
CPI Ex Food and Energy  YoYApr 2.10% 2.10% — 2.00%

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