The March reports remained consistent with the view that inflation will move toward the Fed’s 2% goal, perhaps sooner than expected. The FOMC minutes were not expected to surprise, but several Fed officials felt that it might be appropriate to move the federal funds rate above a neutral level for a time. As expected, the Congressional Budget Office is projecting higher deficits for the foreseeable future. Stock market participants ignored all this, buffeted by shifting perceptions of the White House’s trade policy.
The y/y increase in the core Consumer Price Index rose to 2.1% in March (vs. +1.8% in February), as the March 2017 drop in wireless telecom services rolled off the 12-month calculation. Bear in mind that the Fed uses the PCE Price Index as its inflation gauge, which has been trending about 0.3 percentage point below the CPI. The reports on producer prices and import prices reflected a gradual buildup in pipeline pressures, consistent with the view that the Fed is nearing its inflation goal.
While inflation is still low by historical standards, it’s nearly matched gains in average hourly earnings, leaving inflation-adjusted earnings up modestly from a year ago. This suggests little firepower for consumer spending growth for the typical worker, which is consistent with the softer spending numbers we’ve seen in recent months.
The FOMC minutes from the March policy meeting showed that Fed officials generally saw the soft 1Q17 economic data as “transitory,” and therefore unlikely to deter them from gradually raising short-term interest rates. More importantly, several Fed officials saw growth as likely exceeding its potential, requiring an above-neutral federal funds rate to get back to a long-term sustainable trajectory.