For reasons not at all clear to me, there is growing talk the last few days that Janet Yellen & Company might raise the Fed Funds rate at the upcoming meeting of the Fed Open Market Committee (FOMC) on June 16-17. That seems surprising given that we had a terrible GDP report last Friday showing that the economy actually contracted at an annual rate of -0.7% in the 1Q.

The latest GDP report was in-line with the pre-report consensus, so it had little effect in the financial markets after its release. However, there was general agreement that the very weak GDP report assured that the Fed would not raise rates anytime soon, as I have argued all along. And I believe that remains the most likely case.

Yet some analysts have taken the position in the last few days that the Fed is starting to worry about inflation heating up just ahead. I just don’t see it. The Consumer Price Index (CPI) rose only 0.1% in April, following a rise of 0.2% in March. CPI for all of 2014 rose only 0.8% and is expected to remain well below the Fed’s target of 2% this year.

The Fed’s preferred gauge of inflation is the Personal Consumption Expenditures Price Index, or PCE, that is reported by the Commerce Department. The PCE rose just 0.1% in the 12 months ended in April. That’s the lowest 12-month level since October 2009. Core PCE (excluding food and energy) did rise by 1.2% in the 12 months ended in April, but that is still a far cry from the Fed’s target of 2%.

April was the 36^th consecutive month that PCE has been below the Fed’s 2% target. That’s the longest sub-2% stretch since the 1960s.

Given that inflation as measured by PCE is trending decidedly lower on an annual basis, I can’t imagine that the Fed is worried about it. In fact, I’m sure of it. If we look at the minutes from the Fed’s most recent policy meeting in April, you’ll see why:

The medium-term forecast for inflation was little changed, with inflation in 2016
and 2017 projected to move closer to, but remain below, the Committee’s longer-run objective of 2 percent… [Emphasis mine.]

There you have it – the Fed is not currently worried about inflation.

So is there something else worrying the Fed? With regard to a rate hike, it’s certainly not the economy. The latest FOMC minutes acknowledged that 1Q growth was below the Committee’s forecast (no kidding!).  If the Fed was worried about the economy, it would be because it’s too weak, not too hot.

There was essentially no change in the Fed’s outlook on when to raise the Fed Funds rate:

The Committee agreed to maintain the target range for the federal funds rate at
0 to ¼ percent and to reaffirm in the statement that the Committee’s decision about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation.

Members continued to judge that this assessment of progress would take into
account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Members agreed to retain the indication that the Committee anticipates that it will
be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

…most participants felt that the timing of the first increase in the target
range for the federal funds rate would appropriately be determined on a meeting-
by-meeting basis and would depend on the evolution of economic conditions and
the outlook.

I think it is fair to say that almost no analysts expect a rate hike at the June 16-17 FOMC meeting. While there are a few members of the Committee who would like to raise the Fed Funds rate this month, they do not appear to be in the majority based on the minutes. I continue to believe it will be the September 16-17 meeting at the earliest, and if the economy does not improve significantly this summer, not even then.

What do think? Will the Fed increase roll out an increase in September or wait?