The May statement was almost exactly as anticipated, and the surprises were very small and didn’t influence our views on the policy outlook. Virtually all the changes the FOMC made to the statement were to reflect the rise in 12-month core PCE inflation in April to near 2%.
The statement did not dwell on the deceleration in growth in Q1. Despite soft readings on Q1 consumer spending and residential investment since the March meeting, the statement continued to say that household spending “moderated from its strong fourth-quarter pace.” Business fixed investment was no longer described as having “moderated”; rather, it “continued to grow strongly.” We’d thought something more than “moderated” might have been in order for household spending, but we don’t read much into that. In the second paragraph, the FOMC removed the line, “The economic outlook has strengthened in recent months.” As a base case, we had them keep it, but we stressed that they could remove or adjust the language and that such a change shouldn’t be seen as a dovish signal. We still see it that way. It’s true, after all, that the outlook hasn’t strengthened since the March meeting. The takeaway is that the FOMC did not signal any concern about the Q1 moderation in GDP growth.
The changes in the inflation language were about as expected. In the first paragraph, it was noted that core and headline inflation “have moved close to 2 percent.” The FOMC continued to say that market-based measures of inflation compensation “remain low.” In addition to those changes, the FOMC adjusted the language on inflation in the second paragraph, which describes the outlook. Inflation is now expected to “run near” the 2 percent objective over the medium term.
The FOMC also took the opportunity to insert “symmetric” before the “2 percent objective.” Previously, “symmetric” appeared only in the last paragraph when the statement described how policymakers would assess expected inflation developments. By adding another “symmetric,” the FOMC took an opportunity to remind market participants that inflation will sometimes be above 2 percent and that a move somewhat about the objective won’t trigger a substantial change in policy. It’s consistent with the reaction function reflected in the March SEP: The FOMC sees appropriate policy as allowing a limited overshoot of 2 percent inflation in accordance with the goal being symmetric.
Finally, the omission of “monitoring inflation developments closely” from the sentence about risks to the outlook was a natural change, given that it was added in June 2017, when inflation had slowed quickly and taken center stage in monetary policy deliberations.