The Federal Reserve held interest rates unchanged following today's meeting, but also left a few clues that they see economic activity and inflation heating up more than previously projected.  A rate hike in June looks all but set in stone, and today's statement is consistent with two more rate hikes in the second half of the year, for a total of four hikes in 2018.

In the statement following the meeting, the Fed noted that job gains have continued to remain strong "on average," - acknowledging the unusually large increase in February followed by the tepid March report - while also highlighting continued strong growth in business fixed investment. Meanwhile, language was once again upgraded in relation to inflation.  In the March statement, the Fed changed their projection for moving towards the 2% target from "this year" to "in coming months." With recent data on the PCE price index showing a 2% year-to-year increase in March, the Fed today appropriately removed wording about running below the target all together, and now expects inflation to "run near" the target over the medium term. 

What is likely to get the most news coverage from today's statement is the addition of the word "symmetric" when talking about the risk of inflation.  While previously the "risk" of inflation was that it was running low, the risk of inflation running high now also warrants Fed watching.  We think this "symmetric" wording is a signal that the Fed plans to keep a steady pace of 25 basis point rate hikes (think once every other meeting), meaning four hikes this year and four in 2019.

Markets, meanwhile, have come around to a more aggressive view on the Fed raising rates. Back on March 21st, the day of the last Fed statement, markets were pricing in a 37% chance of four or more hikes in 2018.  Now the odds are 49%, and moving higher with each passing week.  

We will get a better read on the Fed's viewpoint for the remainder of the year following the June meeting, when the Fed releases updated economic projections and Chair Powell will hold a press conference. In the meantime, the Fed will continue reducing its balance sheet at a pace of up to $30 billion per month, increasing that to $40 billion in Q3, and $50 billion in Q4.  After that, the Fed is projecting it would maintain that $50 billion monthly pace until it's satisfied with the size of the balance sheet.  (For the foreseeable future, the balance sheet cuts would be 60% in Treasury securities and 40% in mortgage-related securities.)

Brian S. Wesbury, Chief Economist
Robert Stein, Dep. Chief Economist

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