Is it the dots or the data?

The Federal Reserve gives itself only two days to discuss and decide monetary policy when its FOMC meets eight times a year. Today, voting members had in essence only a few hours because the government released May’s Consumer Price Index (CPI) report at 8:30 a.m. and the meeting statement goes out promptly at 2 p.m. Both headline and core price inflation rose slower than consensus expectations (core CPI excludes food and energy/fuel costs). 

It’s hard to imagine the time crunch altered their decision to leave the fed funds rate within the target range of 5.25-5.5%. Fedspeak since the last Summary of Economic Projections (SEP) indicated they would stay put. But one wonders if the deadline led to an inconsistency. Policymakers increased their estimate of where its preferred measure of inflation, the Personal Consumption Expenditures Index, will be at year-end from 2.6% to 2.8%, yet simultaneously signaled in the ‘dot plot’ that they expect to cut rates by 25 basis points before 2025.

To be fair, in his press conference, Chair Powell did infer that the data is more important than the dots, suggesting that the latter can change if the former does. It’s important to remember that these numbers are averages. In any case, Powell steered the message to the dovish side by saying the CPI report is “a step in the right direction” and that no one on the FOMC committee anticipates hiking rates. In the same vein, the policy statement described inflation’s downward move as “modest,” which sounds negative until you recall that the May meeting’s document said there had been a “lack of” progress. 

If we can glean anything from the whole affair it’s that Fed officials have lost none of their anxiety. On the one hand, the longer they keep the fed funds rate over 5%, the greater the chance they break something and get blamed for it. On the other hand is their nightmare scenario in which they repeat the mistake of the 1970s. That’s when they cut rates only to see inflation pick-up, forcing it to reverse course with numerous hikes. So, even though the Fed is clearly biased to cut rates, it has a high hurdle to reach the first cut. 

And about its other mandate of a healthy labor market? Powell said the employment situation is in better balance (thanks in part to immigration), still robust and contributing inflation pressures through wage gains but not overheating. Powell reiterated that if the jobs market weakens unexpectedly, “the Fed is ready to respond”—in other words, cut. Policymakers clearly want to end this tightening cycle, and will act if inflation falls or the labor market slows. In the meantime, they remain patient.