Got the Wording Right on Inflation

(“Somewhat”) and on Reinvestment (“Relatively Soon”) 

We got the most important elements correct: (1) deleting the first “somewhat,” which had moderated the language on inflation running below the objective in the backward-looking first paragraph, but keeping the second one, in the forward-looking second paragraph, and (2) adding “relatively soon” to describe the expected timing of the phasing out of reinvestment. 

The omission of the “somewhat” in the first paragraph (describing inflation behavior currently) reflected that inflation is even lower than at the time of the last meeting and, indeed, more than ½ percentage point below the objective. We also correctly anticipated they would leave it intact in the forward-looking second paragraph,  to give a more optimistic impression of where they thought inflation was headed: Inflation is below target now, but at least will only be somewhat below target in the near term. 

On the other hand, we were incorrect in anticipating that the statement would add an important caveat (“in part due to transitory factors”) to inflation being below 2% in the first paragraph. Frankly, it’s surprising that they didn’t include something like this. Perhaps participants were concerned that if they added it at this meeting, they would be drawing too much attention to the slowdown. They may have been concerned that if they said they attributed the slowdown “in part” to transitory factors they might give the impression that they saw a more serious underlying weakening as responsible for the rest of the slowdown. While FOMC  participants have generally allowed that there “may be more going on” with inflation than temporary weakness  (to use Yellen’s wording), they wouldn’t want to imply that that is their base case. There must have been discussion about this since Yellen has been using the “in part” caveat in her recent public remarks.  

In any case, time will tell! The FOMC won’t be seriously considering a rate hike until December at the earliest.  Before then there will be plenty of time to assess the incoming data. Of course, the 12-month core PCE  inflation rate will remain depressed into early 2018 as the price-level shock remains in the 12-month window.  We expect that they (somewhat reluctantly, but necessarily) will be looking at price changes over shorter time periods to make a judgment about whether or not the underlying inflation rate is still near 1¾%.  

Interpreting the change to the language on the expected timing of an announcement phasing out reinvestment is more straightforward. A September announcement is all but certain, and it would be financial market disturbances, not the incoming economic data, that might derail it. Not only did the FOMC replace “this year” relatively soon, but they also added the qualifier “for the time being” to the start of the paragraph.  

In the end, it is always fun to see how our statement guess compares with the Committees! This statement ended up being a non-event. We expect a September announcement of phasing out reinvestment, though it depends somewhat on the market and negotiations about the debt ceiling, and a December funds rate hike,  which is much less certain. We see a December hike as more likely than not, based on our expectations for the incoming data. But more so than in the recent past, the decision to hike will depend on the incoming data,  with the FOMC being much less inclined to point to its forecast.

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