What is so special about “symmetric”? Last week the Federal Reserve added this one little word to its post meeting statement, which created quite a stir. As we know, the latest economic numbers show the Fed’s inflation target (as measured by core PCE) is just shy of its 2% target, and everyone wants to know how reaching this target will impact the speed of rate increases. The Fed said:
“The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.”
What does this mean for the speed of rate increases? Some say it is hawkish, some say dovish and others think it is balanced. We could speculate, but we think the data will have the final word. If we look at core PCE over the last twenty years, it was only over 2% consistently during the four years prior to the financial crisis. In fact, the average over the last 20 years is only 1.6%.
What the data says to us is that a small rise above 2% is not uncommon in a robust economy, and that the Fed can just continue slowly raising rates. It can indeed be balanced and symmetric in raising rates. From our perspective, this is fine. As we have been saying for a while, getting more income in high quality bond portfolios is a good thing!
Sources: The Federal Reserve, Bloomberg, The Financial Times, The Wall Street Journal