The Federal Open Market Committee's increased focus on inflation in last week's FOMC statement could signal the committee is readying the market for a 50 basis point increase by its June meeting or even earlier, according to Federal Reserve watchers.
Last week's FOMC statement added phrases showing the committee's increasing concern with inflation. The market was surprised by the hawkish tilt and it showed--yields on the 10-year Treasury jumped from 4.47% before the statement's release to 4.62% after. "The new phrases focusing on inflation are a baby step toward removing the 'measured pace' phrase," said Dean Maki, Barclay Capital's chief U.S. economist. According to Maki, a 0.3% or 0.4% increase in the core consumer price index or personal consumption expenditures before the next FOMC meeting would clinch a 50bps increase. Maki considers such a rise in inflation quite possible.
At the same time, the FOMC added a new phrase, "with appropriate monetary policy action," to its statement on the balance of growth and inflation to give itself some wiggle room in decision making, according to John Herrmann, director of economic commentary at Cantor Viewpoint. Herrmann does not think core CPI and PCE would jump so high as to justify a faster Federal Funds rate increase by the May 3 meeting. But he predicted the next FOMC statement will include even more hawkish language, which could drive 10-year yields to 4.75%.
Michelle Smith, Federal Reserve spokeswoman, did not return a call by press time.
