The Federal Reserve released minutes from its May meeting on Wednesday. The minutes indicate officials are more worried about inflation falling below 2 percent than overheating.
WASHINGTON — Federal Reserve officials gave no indication that they are likely to speed up their pace of interest rate increases during their most recent two-day meeting, suggesting instead that they would be willing to allow the inflation rate to rise slightly above 2 percent for a “temporary period,” while the economy continues to expand.
Minutes from the meeting, which ended May 2 and are released after a typical three-week delay, reveal Fed officials are on track to raise rates again in June. The minutes also indicate officials are less worried about inflation rising above 2 percent, its current level and the Fed’s target rate, than they are about the rate of inflation dipping again.
Officials continue to see the economy as strong, but they remain worried about global trade tensions, including potential damage from American and Chinese tariffs and the possibility that uncertainty over trade policy could already be crimping business investment in the United States.
Officials at the Federal Open Market Committee concluded the May 2 meeting with a unanimous decision to leave the Fed’s benchmark interest rate unchanged at its current level, a range from 1.5 to 1.75 percent. The Fed last raised interest rates in March, by a quarter of a percentage point. It is widely expected to raise them by the same amount at its next meeting in June.
The minutes from the May meeting reported that officials said recent economic indicators “had increased their confidence that inflation on a 12-month basis would continue to run near the Committee’s longer-run 2 percent symmetric objective.” But the minutes noted that some officials believed “it was premature to conclude that inflation would remain at levels around 2 percent, especially after several years in which inflation had persistently run below the Committee’s 2 percent objective.”
Some officials noted, the minutes added, that “a temporary period of inflation modestly above 2 percent would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.”
As if to drive home the point, the minutes use the word “symmetric” nine times in reference to inflation. Two additional references are found in the statement they released after the May meeting, which noted that annual inflation “is expected to run near the committee’s symmetric 2 percent objective over the medium term.” Analysts have largely seen the inclusion of “symmetric” as an indication that Fed officials would be willing to tolerate inflation running slightly above target for a period of time. Researchers at Morgan Stanley said this week that in reading the minutes, they would “pay careful attention to the discussion behind the upgraded language” on inflation.
The emphasis on “symmetric” — and the policy stance it signals — is likely to cheer economic advisers in the White House, who have long insisted that the $1.5 trillion tax cut package President Trump signed into law late last year will boost economic growth without stoking higher inflation. Many analysts expect that an acceleration in the pace of rate increases would dampen growth and potentially offset some of the stimulus from the cuts and from the federal discretionary spending increases that Mr. Trump and congressional leaders agreed to earlier this year.
The policy decision at the May meeting was widely seen as an affirmation by Fed officials that they will stay the course on their plans to increase rates to historically normal levels, after leaving them near zero for years following the Great Recession. The minutes seem to affirm that Fed officials are not wavering in that approach — though they report officials expressing “a range of views” on the amount of rate increases that will be needed to maintain the Fed’s policy objectives in the medium term.
Economic projections released after the Fed’s March meeting suggest officials expected to raise rates two more times in the months to come, for a total of three increases this year. Nearly half of the officials indicated they expect one additional increase on top of that, for a total of four in 2018. Many economists continue to forecast a total of four hikes this year, as well.
Recent economic data points have seemed to validate the Fed’s approach. The unemployment rate has dropped to 3.9 percent — though at the time of the May meeting, the most recent data showed 4.1 percent. While wage growth remains sluggish, particularly for a time of such low unemployment, the inflation rate has risen to about 2 percent, which is the Fed’s target annual rate.
A few developments in the data appear to have surprised officials in recent months, the minutes indicated. One was a slowdown in growth in advanced countries around the world, particularly the United Kingdom. Consumer spending in the United States has lagged the expectations of Fed staff in recent months, the minutes showed, which in turn has lowered the staff’s growth projections slightly.
While some Fed officials have warned in recent months that they are concerned about the economy “overheating” — a condition when very low unemployment sets off a rapid increase in wages and prices, which then forces the Fed to raise rates abruptly — there were few signs of such concerns in the May meeting statement. There were continued signs — as Fed officials expressed in their March meeting — of concern for the potential harm from an escalating trade war with China. The Trump administration remains locked in negotiations with Chinese leaders that have included threats of tariffs on both sides.
Fed Chairman Jerome H. Powell has taken a wait-and-see approach to such risks in public comments this spring. In the May minutes, other officials reported unease among business leaders they had spoken to about trade. In several Fed districts, the minutes said, “contacts expressed concern about the possible adverse effects of tariffs and trade restrictions, including the potential for postponing or pulling back on capital spending.” In other cases, “it was noted that the potential for higher Chinese tariffs on key agricultural products could, in the longer run, hurt U.
