FOMC still puzzled by inflation - Rabobank

The Federal Open Market Committee shows it is still puzzled by inflation – or the lack thereof as the Minutes of the December FOMC meeting released yesterday highlight that despite the decision to raise the Fed funds target by another 25bp last month, there are still questions and concerns about the reasons why inflation remains below target even as the economy continues to expand, explains the research team at Rabobank.

Key Quotes

“Looking ahead into 2018, the inflation puzzle is likely to continue. Although the Fed’s dot plot still projects three rate hikes for this year, a few participants indicated that they were not comfortable with the three rate hikes in 2018 implied by the median projections for the federal funds rate. We are in the same camp, as we continue to see the core PCE deflator will continue to lag behind the Fed’s 2% inflation target. As a result, we believe that the FOMC will decide to skip March as an opportunity for a next rate increase, and instead we only see two rate hikes; one in June and one in December.”

“The first US data for the year continues to add fuel to the inflation debate. The ISM manufacturing index for December rose to 59.7, signalling further momentum in the US economy with a strong new orders sub-component suggesting that this momentum may persist at least in the early months of 2018. Although the ISM’s employment index fell somewhat, it remained strongly on the expansionary side of the scale, indicating that factories continue to hire new workers at a steady pace.”