Fed Thoughts: Scheduling Conflicts

First things first. The Federal Reserve will announce a quarter-point firming of its policy rate at the conclusion of the meeting of the Federal Open Market Committee held on June 13th and 14th. We know this from the sheer force of repetition. Numerous Fed officials explained that the weak first-quarter data on spending was transitory, the economy is at full employment, and inflation is headed toward the goal of 2 percent. In the minutes of the May meeting, they repeated the phrase that "…it would soon be appropriate for the Committee to take another step in removing some policy accommodation…" which they had used in January to signal action at the next meeting. At this point, such repetition is like entering into a contract.

For a committee branding itself as making all decisions meeting by meeting in a data-dependent manner, the FOMC uses a lot of the calendar runway before taking off. And there was a lot of data a decision could depend on during the intermeeting period. After revision, the first-quarter slowing in real GDP is less pronounced but tracking estimates suggest that the second-quarter rebound is less vigorous. Economic reports are still outpacing the expectations of economists, but less so and eerily uneven. Survey measures are mostly positive but hard data are lackluster. Most worrisome among the latter is the slowing of job gains, which should be associated with a slowing in income growth. Still, this might be about the trend, not the cycle because if labor-force participation rate is permanently lower, job gains will consistently run slower in line with demographically-driven weaker population growth. An unemployment rate of 4.4 percent would seem to be below its natural rate, but the gentle rise in core inflation of the past year has recently stalled out.

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