Fed Note:

The May Fed meeting was a ‘minor’ one, with no press conference or economic projections, so was not considered to be one with a high probability of action.  This ended up being the case, with the Fed Funds rate being maintained at 0.75-1.00%, per the bump higher in March.  The formal statement acknowledged that the labor market has continued to strengthen, despite a slowing in economic activity.

With conditions holding steady, many economists are seeing the odds of another rate hike in June at better than 50%, with those chances remaining data dependent, as usual.  Aside from growth and labor market information received between now and then, the fiscal situation in Washington remains a wildcard, with any success in pro-business legislation likely providing a boost to broader economic growth and risk asset markets perhaps, while inaction could keep pushing out the timeframes for these catalysts.  Progress has been slower than expected, which could partially be due to the personalities involved and partially due to Washington business as usual.

The dashboard of Fed items is little changed from March:

Economic growth:  Hopes have been riding on economic growth expansion, from the 1-2% of late, to a higher level driven by fiscal spending and business capex.  These have not yet come to fruition, with timetables being pushed off somewhat due to legislative bickering, although business spending has shown signs of life anecdotally.  At the same time, promises of a growth rebound to the upper 3’s to 4’s, as seen in the Reagan era, driven by similar stimulus, look unlikely due to very different (and weaker) demographic and productivity dynamics in place today.

Inflation:  The key here has been a firming of underlying CPI and other inflation numbers on a year-over-year basis, now that energy prices have again reflated.  This has pulled headline inflation up to a higher level, but core has also moved with carryover from energy into underlying prices in other goods, as well as strong housing prices and rents, as well as faster price growth in areas like medical goods and services; however, the rate of change has tempered a bit as of late (in addition to the different compositions of various inflation indexes).  A mixed dollar has been either a headwind or tailwind to import prices, an area which deflation is preferred for those buying imported goods (most of us, in most things) but is tougher for U.S. exporters.

Employment:  As we’ve continued to note, labor markets have been strong and are continuing to improve, as noted by a low unemployment rate, good JOLTs readings, low levels of jobless claims and other data.  We’re now at or even a bit below the theoretical level of ‘full employment’, which means further gains could be more challenging, but not impossible.  The downside of this cycle has been that job quality hasn’t been exceptional (a large number of job gains are in the lower end, such as retail and food/beverage services) and wage growth overall hasn’t really taken off as many have expected. 

Investment markets have reflected some of the disappointment in recent weeks as Trump’s policies haven’t moved ahead as quickly as promised.  On the positive side, slow, steady interest rate increases have generally been positive for equity markets and risk assets, notably if coupled with improving earnings growth, as they imply a positive environment (the Fed wouldn’t raise rates if the economy didn’t warrant it).  Expectations for inflation and future growth have tended to be drivers of bond returns over the long term, and bonds may not perform terribly if rates rise incrementally and not in dramatic spurts higher—regardless, yield curve positioning is important with rates so low, which shrinks the room for error.