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Economic Insights Commentary by Robin Anderson and the Economic Committee

For the week of April 30 - May 4, 2018

Mission accomplished? When investors think about inflation, one number comes to mind: 2%. While the Federal Reserve (Fed) started formally targeting inflation at 2% relatively recently (2012), this number is etched in investors’ brains. Several of the inflation indicators that the Fed watch are now at or above that level. As of March, the headline Personal Consumption Expenditure (PCE) deflator hit 2%; headline Consumer Price Index (CPI) inflation was at 2.4%, ex-food and energy, or core, CPI inflation reached 2.1%. Core PCE inflation inched near 2%, at 1.9%. Does that mean that the Fed can say mission accomplished?

What does a symmetric inflation target mean? Well, inflation has been running below 2% for some time, so the Fed will likely be okay with letting inflation over shoot for a little while. Core PCE inflation has only been above 2% once this cycle, March 2012. Before hitting 2% in March, headline PCE inflation had been below the Fed’s target since 2012. Headline CPI inflation fell below 2% from mid-2014 through December 2016, and temporarily dropped below 2% mid last year before bouncing back. Core CPI inflation was below 2% most of last year, then rebounded.

After last week’s meeting, the Federal Open Market Committee (FOMC) statement suggested that the Fed was happy with inflation’s progress. The policy statement removed the line, “the Committee is watching inflation developments closely.” This is somewhat of a big deal. According to Tom Porcelli of RBC, that language has been in the policy statement since 2014.

The Fed must also be watching wage growth before declaring inflation victory. Average hourly earnings had been trending up in recent months, but now appear stable. And at 2.6%, it is still well below the prior cycle’s peak. In fact, sluggish wage growth suggests the economy has not reached full employment yet, despite an unemployment rate at 3.9%.

However, the FOMC is likely willing to tolerate some time with inflation above 2%. The statement changed reflecting that inflation was no longer moving up to 2% but, indeed, was running near 2%. The forward-looking statement about inflation also now emphasized that the 2% goal was symmetric. The FOMC had already emphasized its symmetric inflation target in the next paragraph of the statement but not in the forwardlooking statement.

While several inflation measures have reached 2%, the Fed’s work is not quite done. Inflation and wage growth have been down for long, even as both indicators move up, the Fed is likely going to be cautious before moving away from their “gradual” path of rate increases. This means that even as inflation likely stays at or modestly above 2% this year, the Fed may only hike two more times.

Expressions of opinions and predictions are accurate as of the date of this communication and are subject to change without notice. There is no assurance that such events or prospections will occur and actual condition may be significantly different than that shown here.

Economic Insights • April 30 - May 4, 2018

Just fine jobs report The jobs report was pretty good, but not great. Headline payroll growth disappointed versus expectations for a second month in a row. Jobs were up by 164,000, versus around 190,000 expected. March payrolls were upwardly revised to 135,000, compared to 103,000 initially estimated. Although two weak prints do not make a trend, there may finally be fewer workers waiting on the sidelines to rejoin the labor force. The headline payroll number comes from the establishment survey. The household survey, which provides the unemployment rate, showed employment up by only 3,000 after losing 37,000 last month. Keep in mind this is a noisy number. After six months at 4.1%, the unemployment rate dropped to the lowest level in 17 years, 3.9%. That’s great news! However, with the unemployment ra