The Federal Reserve still has faith, even if some economic numbers are moving the wrong way.

The minutes of Fed officials' June 13-14 meeting tell us something about the current soft patch in U.S. data, especially inflation.  

The Fed is largely sticking to the script. The retreat in inflation is transitory, idiosyncratic even, and the slow-but-steady slog back toward the central bank's 2 percent target will probably resume. The overall tone is one of economic optimism, guarded in places, and helped by a better global picture. Gradual interest-rate increases can continue, with some debate about timing and magnitude. The lack of wage growth and inflation doesn't seem to shake most officials' confidence.

Why is this important? It's tied up with the question of when the very low unemployment rate will result in significant and consistent wage increases, arguably the most important missing ingredient since the economy began growing again in the second half of 2009. Without inflation, workers are less likely to agitate for higher pay. And without jumps in compensation, it's tougher for inflation to get back to a healthy level.

Granted, the labor market keeps strengthening, even if wages have been subdued. At 4.3 percent, the jobless rate keeps punching through the Fed's forecasts and is below the level officials consider is sustainable over the long run. At this point, the prevailing wisdom is that there is so little slack that wages and inflation just have to — at some point — really start to pick up.

So what did Fed officials have to say about this during their June discussion?

Some signs of light: “Contacts in several Districts reported shortages of workers in selected occupations and in some cases indicated that firms were significantly increasing salaries and benefits in order to attract or keep workers.”

The next sentence gave more cause for concern: “However, other contacts reported only modest wage gains, and participants observed that measures of labor compensation for the overall economy continued to rise only moderately despite strengthening labor market conditions.”

No real sign of alarm here, though there is an element of doubt starting to creep in to the central bank's discussions. It matters because quite a bit of data lately has been moving the wrong way or falling short of economists' estimates. 

True, the last couple of years have shown a pattern of softness at the start of the calendar year followed by a pickup. But there was reason for hope: The measure of inflation the Fed most closely watches, the personal consumption expenditure price index, breached the 2 percent target in February. Then it began to slip, to 1.8 percent in March, then 1.7 percent in April and, finally, to the 1.4 percent recorded in May. So much for that.

Instead of economic momentum picking up as many market participants anticipated, activity seems to have slipped back into the world of 2 percent. Take the Atlanta Fed's GDPNow forecast for second-quarter economic growth. It's retreated to about 3 percent. Not terrible and entirely consistent with where the overall economy has been since it began growing again, but the direction is clear. In early May, it was 4.3 percent. By early June it was 3.4 percent.

Similarly, the IMF last week nudged down its forecasts for American growth to 2.1 percent from 2.3 percent. Again, not a dramatic shift. Solid, steady, unspectacular and probably durable. And it's true the IMF has become more optimistic about global prospects, which helps the U.S. 

But it's still more of the same. Not the takeoff in wages or overall activity that should be happening at this point in the economy's expansion or, critically, with the jobless rate at 4.3 percent.

The Bloomberg U.S. Economic Surprise Index tells a similar story. The gauge, which measures how the economic data compare with economists' estimates, slipped below zero last month — indicating disappointments. That was the first time since November's general election.

But none of this is necessarily squaring with acceleration in wages or a return to a level of inflation that matches the Fed's target. It should be happening by now.

A slight whiff of doubt in the minutes from at least some participants: “Several participants expressed concern that progress toward the Committee’s 2 percent longer-run inflation objective might have slowed and that the recent softness in inflation might persist. Such persistence might occur in part because upward pressure on inflation from resource utilization may be limited, as the relationship between these two variables appeared to be weaker than in previous decades.”

First, the big rap on the expansion was that it was a jobless recovery. Then the unemployment rate fell, and it became the wageless recovery.

Fed officials still believe in their “slow and steady” approach, mostly. The rest of us wait for the data to back them up.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Daniel Moss at

To contact the editor responsible for this story:
Philip Gray at

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