Dovish Fed to Let Inflation Run Over Their 2-Percent Goal for “Temporary Period”

The U.S. Federal Reserve meeting minutes released on Wednesday at 1800 GMT contained few surprises. The minutes pointed to an interest rate hike at the June meeting. This has already been priced into the market. The Fed also indicated it will let inflation run above their 2 percent goal for a “temporary period”.

The early reaction by the markets suggests a slightly dovish tone in the minutes.

“A few participants commented that recent news on inflation, against a background of continued prospects for a solid pace of economic growth, supported the view that inflation on a 12-month basis would likely move slightly above the Committee’s 2 percent objective for a time,” the minutes said.

“It was also noted 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.”

Fed officials described wage pressures as “moderate” though it noted there has been more pressure in industries where labor supply is tightening.

A few members stated that the Fed is getting close to its “neutral” goal of setting a rate that is neither constrictive nor overly expansionary to growth.

The minutes indicate that central bank officials remain determined to keep increasing rates, but with the gradual approach that it has repeatedly pledged to take.

“Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation,” the minutes said in an indication that another hike is likely soon.

Traders already had been pricing in a 95 percent chance of a quarter-point move at the June FOMC session, followed by another increase in September.

On the economy, the FOMC said their opinions had changed little as they expected continued progress despite some signs of softening in the first quarter.

There was concern expressed over trade and fiscal issues, with Fed business contacts expressing “concern about the possible adverse effects of tariffs and trade restrictions, including the potential for postponing or pulling back on capital spending.”

“They noted a number of economic fundamentals were currently supporting continued above-trend economic growth; these included a strong labor market, federal tax and spending policies, high levels of household and business confidence, favorable financial conditions, and strong economic growth abroad,” the minutes said.

Stocks initially turned positive after the release of the minutes. They have since changed to mixed. U.S. government debt yields fell Wednesday after the minutes were released. This indicates a somewhat dovish tone.