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The Federal Open Market Committee (FOMC) did not change the stance of US monetary policy at its meeting on May 2. Financial markets were not surprised. The minor changes in its policy statement all reflect improvements in recent economic data, notably a resumption of solid business investment and a return of core inflation close to its 2 percent target. The FOMC is widely expected to raise rates one-quarter of a percentage point at its next meeting in June.
With unemployment low and inflation at target, the United States would appear to be in monetary nirvana, as Fed watcher David Wessel tweeted in response to the FOMC statement. However, the big issue looming (aside from the unpredictable effects of a possible trade war) is the massive fiscal stimulus that is hitting the US economy this year and next.
The minutes of the previous FOMC meeting and recent speeches by FOMC participants suggest that the committee is beginning to anticipate the need for a faster pace of rate hikes. For now, that change is limited to a growing consensus that a December 2018 rate hike will be appropriate, marking four hikes in 2018 compared to the three hikes that were expected as recently as last December. In other words, the FOMC is going to wait for clear evidence that the economy is overheating before taking any proactive measures to prevent it.
This slow response is fully justified given the sequence of errors in the opposite direction since 2008, when the FOMC was repeatedly surprised by the slowness of the recovery and the weakness of inflation. Some overshooting of the inflation target would be a good thing. We can only hope we don't get too much of a good thing.
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