The only surprise in today's Fed statement

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As expected, the Federal Reserve has not changed its interest rate director at this day's meeting. However, some changes have been made to the wording of the statement to clarify the thinking of those responsible. (The Wall Street Journal has usefully retraced all the changes made since March.)

Fed Chairman Jerome Powell

Zach Gibson / Bloomberg

Equally interesting is what has not changed. In both cases, the interesting language concerns inflation.

Inflation has been slower than the long-term goal of annual growth of 2% of the PCE price index excluding food and energy almost continuously since the Fed announced its goal in January 2012. Each time it seemed that inflation was accelerating to 2%, it eventually slowed down. The most striking example is only last year, when annual core inflation went from 1.9% in February to only 1.3% in August.

A sharp rise in March (which could still be revised) has reduced the core inflation rate to 1.9%. The Fed acknowledged in its latest release, noting that "global inflation and inflation of non-food and energy products grew by nearly 2% ". Previously, the line was as follows: "The overall inflation and inflation for products other than food and energy continued to be less than 2 percent."

This moderate acceleration of inflation was long overdue and built into the Fed's earlier guidance on the key rate range, which is why the Fed has shown so optimistic about it. Just to reinforce this point, the Fed has added the word "symmetric" to the description of its inflation target. The idea is that the Fed is willing to support temporary periods when prices can rise faster than 2%, just as it was willing to withstand periods when prices rose more slowly than its long-term goal.

The surprising element of the statement is what the Fed had left in its previous meetings: "Market-based inflation compensation measures remain weak". It's hard to justify. The most common measure is the breakeven inflation between US Treasuries and their inflation-linked equivalents five years into the future. This is at its highest level in years and globally corresponds to an inflation target of 2%.

Another measure is the five-year median inflation rate implied by option prices. This too has reached its highest level in a long time and is broadly consistent with a 2% price increase each year. In addition, the implied probability that inflation averages 3% or more over the next five years is at levels comparable to those in which the Fed felt good in the world in 2013-14.

Whatever the reason for mentioning market-based measures in the last statement, this is likely to reinforce the view of traders that the Fed will be cautious about a rate.

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