The Fed's Reserve is Cracking
The Federal Reserve's tone has gotten a bit more hawkish. Judging from what the economy is doing, there may be more to come.</br></br>In the statement released Wednesday following its two-day meeting, the Fed offered a less qualified assessment of the improvement in the job market than it did when it met last month. That was before the strong June jobs report came out. And whereas last month the Fed said that inflation was running below its 2% target, it acknowledged this time that inflation has "moved somewhat closer" to it.</br></br>Indeed, Wednesday's unexpectedly strong report on second-quarter gross domestic product from the Commerce Department showed that the Fed's preferred inflation measure--the price index for personal consumption expenditures--was up 1.6% from a year ago. The first quarter's gain was just 1.1%. The core measure, which excludes food and energy, was only slightly more muted, gaining 1.5% compared with the first quarter's 1.2%. Moreover, inflation's pace picked up, with prices increasing at a 2% annual rate in the second quarter.</br></br>As long as wage growth remains low, though, most members of the Fed's rate-setting committee will probably view a move above 2% inflation as transitory. In their view, as the statement put it, "there remains significant underutilization of labor resources." In plain language, there is still plenty of slack in the job market.</br></br>But the GDP report suggested the economy has strengthened to the point that it should be able to sustain the recent pickup in hiring. And with that, growth in wages may finally get a lift.