As the Fed sets forth a fairly aggressive path toward higher interest rates, one key element could scuttle those plans.
Substantially lower-than-expected inflation would be a significant hurdle for the central bank in its quest to normalize a benchmark rate kept near zero through much of the post-financial crisis economy. The Fed has hiked the rate three times since December 2015 and economists and Wall Street strategists widely expect at least two more moves before the end of 2017.
However, the inflation numbers of late have not been cooperating.
The Fed's preferred measure, the personal consumption expenditures index, is showing gains of just 1.8 percent currently, excluding food and energy, and expected to fall even further. The consumer price index, which is a secondary measure in Fed officials' eyes, most recently showed a 1.9 percent gain for core and 2.2 percent on the headline.
As things stand now, Fed officials are writing off the recent soft economic numbers as "transitory," a go-to term for fluctuations that don't meet their economic expectations. Many experts on Wall Street thus expect the Fed to follow through with projections to hike interest rates twice more this year and begin the long process of unwinding its $4.5 trillion portfolio of government debt known as the "balance sheet."
Investors will get a closer look at behind-the-scenes discussion when the Federal Open Market Committee on Wednesday releases the minutes from its meeting earlier this month.
"We continue to expect the Fed to hike in June and September and announce balance sheet reduction in December," Citigroup economist Andrew Hollenhorst said in a note. "The drama at the June meeting may not be whether the Fed raises rates but what changes in the Fed official economic projections."