FOMC Impact From May CPI (1/2): Inflation Language Likely Softened

The much-softer-than-expected May CPI reading is likely to impact the messaging from the Fed meeting which will conclude soon - albeit the impact could be subtle.

• SEP/Dot Plot: FOMC members will have submitted their economic projections prior to the start of the June meeting, but as Chair Powell noted in Dec 2022 after an inflation print came out on the day before the decision, "just a matter of practice, the SEP reflects any data...that comes out during the meeting."
• We're not sure whether most or even many FOMC participants would be eager to change their projections on the basis of a single month's report. But today's data would render the reaction to a surprise 1-cut median for 2024 in the Dot Plot (vs the 2 expected by most analysts, and 3 in March's projections) for 2024 even more hawkish in light of the apparent "confidence"-boosting report.
• End-year 2024 PCE / core PCE medians were due to be raised from 2.4% / 2.6% respectively (both figures are Q4/Q4), by 0.1-0.2pp each. With core PCE potentially printing 2.6% in May after 2.8% in the previous 3 months, there could be a slight reconsideration, but we think that pre-CPI expectations (+0.1-0.2pp in the SEP) will probably still play out.
• Statement: The language introduced into the statement in May after strong inflation prints for Jan through March - "In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective" - is now likely to be softened after the May report, and perhaps eliminated altogether. That would leave just "Inflation has eased over the past year but remains elevated."
• It is too premature to change the forward guidance, though ("The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.")