— this post authored by Steven Hansen
The 02 May 2018 meeting statement presented the actions taken. This post covers the economic discussion during this FOMC meeting between the members (minutes were released today). There continued to be considerable discussion on inflation and timing on the next federal funds rate increase, and an interesting quote:
… several participants thought that it would be important to continue to monitor the slope of the yield curve, emphasizing the historical regularity that an inverted yield curve has indicated an increased risk of recession …
Analyst Opinion of these minutes
These meeting minutes continue to contain an inordinate discussion on inflation. But the most interesting discussion was the timing of future federal funds rate increases (see last paragraph of the meeting minutes) which states:
Participants commented on how the Committee’s communications in its postmeeting statement might need to be revised in coming meetings if the economy evolved broadly as expected. A few participants noted that if increases in the target range for the federal funds rate continued, the federal funds rate could be at or above their estimates of its longer-run normal level before too long. In addition, a few observed that the neutral level of the federal funds rate might currently be lower than their estimates of its longer-run level. In light of this, some participants noted it might soon be appropriate to revise the forward-guidance language in the statement indicating that the “federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run” or to modify the language stating that “the stance of monetary policy remains accommodative.” Participants expressed a range of views on the amount of further policy firming that would likely be required over the medium term to achieve the Committee’s goals. Participants indicated that the Committee, in making policy decisions over the next few years, should conduct policy with the aim of keeping inflation near its longer-run symmetric objective while sustaining the economic expansion and a strong labor market. Participants agreed that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming information.
One begins to wonder wtf forward guidance is supposed to look like as there seems to be a variety of views on the federal funds rate next increase.
The interesting points are highlighted in bold below. Econintersect publishes below the views of the FOMC members, and ignores the reports given to the members. We are looking for a glimpse of insight into the minds of the FOMC members.
Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in March indicated that the labor market had continued to strengthen and that economic activity had been rising at a moderate rate. Job gains had been strong, on average, in recent months, and the unemployment rate had stayed low. Recent data suggested that growth of household spending had moderated from its strong fourth‑quarter pace, while business fixed investment had continued to grow strongly. On a 12‑month basis, both overall inflation and inflation for items other than food and energy had moved close to 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.
Participants viewed recent readings on spending, employment, and inflation as suggesting little change, on balance, in their assessments of the economic outlook. Real GDP growth slowed somewhat less in the first quarter than anticipated at the time of the March meeting, and participants expected that the moderation in the growth of consumer spending early in the year would prove temporary. They noted a number of economic fundamentals were currently supporting continued above-trend economic growth; these included a strong labor market, federal tax and spending policies, high levels of household and business confidence, favorable financial conditions, and strong economic growth abroad. Participants generally expected that further gradual increases in the target range for the federal funds rate would be consistent with solid expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Participants generally viewed the risks to the economic outlook to be roughly balanced.
Participants generally reported that their business contacts were optimistic about the economic outlook. However, in a number of Districts, contacts expressed concern about the possible adverse effects of tariffs and trade restrictions, including the potential for postponing or pulling back on capital spending. Labor markets were generally strong, and contacts in a number of Districts reported shortages of workers in specific industries or occupations. In some cases, labor shortages were contributing to upward pressure on wages. In many Districts, business contacts experienced rising costs of nonlabor inputs, particularly trucking, rail, and shipping rates and prices of steel, aluminum, lumber, and petroleum-based commodities. Reports on the ability of firms to pass through higher costs to customers varied across Districts. Activity in the energy sector remained strong, and crude oil production was expected to continue to expand in response to rising global demand. In contrast, in agricultural areas, low crop prices continued to weigh on farm income. It was noted that the potential for higher Chinese tariffs on key agricultural products could, in the longer run, hurt U.S. competitiveness.
Participants generally agreed that labor market conditions strengthened further during the first quarter of the year. Nonfarm payroll employment posted strong gains, averaging 200,000 per month. The unemployment rate was unchanged, but at a level below most estimates of its longer-run normal rate. Both the overall labor force participation rate and the employment-to-population ratio moved up. The first-quarter data from the employment cost index indicated that the strength in the labor market was showing through to a gradual pickup in wage increases, although the signal from other wage measures was less clear. Many participants commented that overall wage pressures were still moderate or were strong only in industries and occupations experiencing very tight labor supply; several of them noted that recent wage developments provided little evidence of general overheating in the labor market. With economic growth anticipated to remain above trend, participants generally expected the unemployment rate to remain below, or to decline further below, their estimates of its longer‑run normal rate. Several participants also saw scope for a strong labor market to continue to draw individuals into the workforce. However, a few others questioned whether tight labor markets would have a lasting positive effect on labor force participation.
The 12-month changes in overall and core PCE prices moved up in March, to 2 percent and 1.9 percent, respectively. Most participants viewed the recent firming in inflation as providing some reassurance that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis. In particular, the recent readings appeared to support the view that the downside surprises last year were largely transitory. Some participants noted that inflation was likely to modestly overshoot 2 percent for a time. However, several participants suggested that the underlying trend in inflation had changed little, noting that some of the recent increase in inflation may have represented transitory price changes in some categories of health care and financial services, or that various measures of underlying inflation, such as the 12-month trimmed mean PCE inflation rate from the Federal Reserve Bank of Dallas, remained relatively stable at levels below 2 percent. In discussing the outlook for inflation, many participants emphasized that, after an extended period of low inflation, the Committee’s longer-run policy objective was to return inflation to its symmetric 2 percent goal on a sustained basis. Many saw tight resource utilization, the pickup in wage increases and nonlabor input costs, and stable inflation expectations as supporting their projections that inflation would remain near 2 percent over the medium term. But a few cautioned that, although market-based measures of inflation compensation had moved up over recent months, in their view these measures, as well as some survey-based measures, remained at levels somewhat below those that would be consistent with an expectation of sustained 2 percent inflation as measured by the PCE price index.
Participants commented on a number of risks and uncertainties associated with their expectations for economic activity, the labor market, and inflation over the medium term. Some participants saw a risk that, as resource utilization continued to tighten, supply constraints could develop that would intensify upward wage and price pressures, or that financial imbalances could emerge, which could eventually erode the sustainability of the economic expansion. Alternatively, some participants thought that a strengthening labor market could bring a further increase in labor supply, allowing the unemployment rate to decline further with less upward pressure on wages and prices. Another area of uncertainty was the outlook for fiscal and trade policies. Several participants continued to note the challenge of assessing the timing and magnitude of the effects of recent fiscal policy changes on household and business spending and on labor supply over the next several years. In addition, they saw the trajectory of fiscal policy thereafter as difficult to forecast. With regard to trade policies, a number of participants viewed the range of possible outcomes for economic activity and inflation to be particularly wide, depending on what actions were taken by the United States and how U.S trading partners responded. And some participants observed that while these policies were being debated and negotiations continued, the uncertainty surrounding trade issues could damp business sentiment and spending. In their discussion of the outlook for inflation, a few participants also noted the risk that, if global oil prices remained high or moved higher, U.S. inflation would be boosted by the direct effects and pass-through of higher energy costs.
Financial conditions tightened somewhat over the intermeeting period but remained accommodative overall. The foreign exchange value of the dollar rose modestly, but this move retraced only a bit of the depreciation of the dollar since its 2016 peak. With their decline over the intermeeting period, equity prices were about unchanged, on net, since the beginning of the year but were still near their historical highs. Longer‑term Treasury yields rose, but somewhat less than shorter-term yields, and the yield curve flattened somewhat further.
In commenting on the staff’s assessment of financial stability, a couple of participants noted that after the bout of financial market volatility in early February, the use of investment strategies predicated on a low-volatility environment may have become less prevalent, and that some investors may have become more cautious. However, asset valuations across a range of markets and leverage in the nonfinancial corporate sector remained elevated relative to historical norms, leaving some borrowers vulnerable to unexpected negative shocks. With regard to the ability of the financial system to absorb such shocks, several participants commented that regulatory reforms since the crisis had contributed to appreciably stronger capital and liquidity positions in the financial sector. In this context, a few participants emphasized the need to build additional resilience in the financial sector at this point in the economic expansion.
In their consideration of monetary policy over the near term, participants discussed the implications of recent economic and financial developments for the outlook for economic growth, labor market conditions, and inflation and, in turn, for the appropriate path of the federal funds rate. All participants expressed the view that it would be appropriate for the Committee to leave the target range for the federal funds rate unchanged at the May meeting. Participants concurred that information received during the intermeeting period had not materially altered their assessment of the outlook for the economy. Participants commented that above-trend growth in real GDP in recent quarters, together with somewhat higher recent inflation readings, had increased their confidence that inflation on a 12-month basis would continue to run near the Committee’s longer-run 2 percent symmetric objective. That said, it was noted that it was premature to conclude that inflation would remain at levels around 2 percent, especially after several years in which inflation had persistently run below the Committee’s 2 percent objective. In light of subdued inflation over recent years, a few participants observed that adjustments in the stance of policy should take account of the possibility that longer-term inflation expectations have drifted a bit below levels consistent with the Committee’s 2 percent inflation objective. Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation. Overall, participants agreed that the current stance of monetary policy remained accommodative, supporting strong labor market conditions and a return to 2 percent inflation on a sustained basis.
With regard to the medium-term outlook for monetary policy, all participants reaffirmed that adjustments to the path for the policy rate would depend on their assessments of the evolution of the economic outlook and risks to the outlook relative to the Committee’s statutory objectives. Participants generally agreed with the assessment that continuing to raise the target range for the federal funds rate gradually would likely be appropriate if the economy evolves about as expected. These participants commented that this gradual approach was most likely to be conducive to maintaining strong labor market conditions and achieving the symmetric 2 percent inflation objective on a sustained basis without resulting in conditions that would eventually require an abrupt policy tightening. A few participants commented that recent news on inflation, against a background of continued prospects for a solid pace of economic growth, supported the view that inflation on a 12-month basis would likely move slightly above the Committee’s 2 percent objective for a time. It was also noted that a temporary period of inflation modestly above 2 percent would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.
Meeting participants also discussed the recent flatter profile of the term structure of interest rates. Participants pointed to a number of factors contributing to the flattening of the yield curve, including the expected gradual rise of the federal funds rate, the downward pressure on term premiums from the Federal Reserve’s still-large balance sheet as well as asset purchase programs by other central banks, and a reduction in investors’ estimates of the longer-run neutral real interest rate. A few participants noted that such factors could make the slope of the yield curve a less reliable signal of future economic activity. However, several participants thought that it would be important to continue to monitor the slope of the yield curve, emphasizing the historical regularity that an inverted yield curve has indicated an increased risk of recession.
Participants commented on how the Committee’s communications in its postmeeting statement might need to be revised in coming meetings if the economy evolved broadly as expected. A few participants noted that if increases in the target range for the federal funds rate continued, the federal funds rate could be at or above their estimates of its longer-run normal level before too long. In addition, a few observed that the neutral level of the federal funds rate might currently be lower than their estimates of its longer-run level. In light of this, some participants noted it might soon be appropriate to revise the forward-guidance language in the statement indicating that the “federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run” or to modify the language stating that “the stance of monetary policy remains accommodative.” Participants expressed a range of views on the amount of further policy firming that would likely be required over the medium term to achieve the Committee’s goals. Participants indicated that the Committee, in making policy decisions over the next few years, should conduct policy with the aim of keeping inflation near its longer-run symmetric objective while sustaining the economic expansion and a strong labor market. Participants agreed that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming information.
Source:
https://www.federalreserve.gov/monetarypolicy/fomcminutes20180502.htm
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