Solid Growth, Soft Inflation

The statement identified the opposing forces that are challenging monetary policymakers: It upgraded the  assessment of growth and the labor market while recognizing the disappointment in the continuing low  readings on the incoming data for core inflation. 

▪ The characterization of growth as “solid” points to the apparent building momentum observed in the recent data, which has been all the more impressive in light of disruptions caused by hurricanes. ▪ They have acknowledged for some time now that inflation excluding food and energy has been running below the 2-percent objective and was expected to continue to do so in the near term. But labeling the recent inflation data as “soft” reinforces this message and indicates that concern about persistently low inflation has not yet been alleviated. 

The statement did not send a strong signal about how the conflicting pull of solid growth and soft inflation would tilt their December decision. They left themselves the options of pausing or hiking.  ▪ They could pause to await clarification of the inflation picture in the incoming data. ▪ Or they could go, based on solid growth, a low and declining unemployment rate, and a forecast of inflation that still shows inflation moving back to the 2-percent objective. 

Nevertheless, participants have made clear with their median dots for this year submitted in September that,  notwithstanding these opposing forces, there is a strong consensus for a December rate hike. ▪ We don’t see developments since then as likely to have undermined that consensus. ▪ And they did not use the November statement to suggest they had stepped back from the impression left by the September median dots. 

▪ We put an 80% probability on a December rate hike. 

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