— this post authored by Steven Hansen
The 30 January 2019 meeting statement presented the actions taken. This post covers the economic discussion during this FOMC meeting between the members (minutes were released today). An interesting quote:
… Participants noted that some risks to the downside had increased, including the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe, a rapid waning of fiscal policy stimulus, or a further tightening of financial market conditions. An increase in some foreign and domestic government policy uncertainties, including those associated with Brexit, an escalation in international trade policy tensions, and the potential for additional extended federal government shutdowns were also cited as downside risks …
Analyst Opinion of these minutes
I suggest everyone read these minutes – they have not been cookies cutter minutes (having little real change between meeting) since the departure of Chair Janet Yellen.
There was discussion on future federal funds rate increases:
… Participants noted that maintaining the current target range for the federal funds rate for a time posed few risks at this point. The current level of the federal funds rate was at the lower end of the range of estimates of the neutral policy rate. Moreover, inflation pressures were muted, and asset valuations were less stretched than they had been a few months earlier. Many participants suggested that it was not yet clear what adjustments to the target range for the federal funds rate may be appropriate later this year; several of these participants argued that rate increases might prove necessary only if inflation outcomes were higher than in their baseline outlook. Several other participants indicated that, if the economy evolved as they expected, they would view it as appropriate to raise the target range for the federal funds rate later this year.
It seems the FOMC is not entirely sure of the future direction of inflation.
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. The highlighted areas were added to emphasize important elements.
Participants’ Views on Current Conditions and the Economic Outlook
Participants agreed that over the intermeeting period the labor market had continued to strengthen and that economic activity had been rising at a solid rate. Job gains had been strong, on average, in recent months, and the unemployment rate had remained low. Household spending had continued to grow strongly, while growth of business fixed investment had moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation and inflation for items other than food and energy had remained near 2 percent. Although market-based measures of inflation compensation had moved lower in recent months, survey-based measures of longer-term inflation expectations were little changed.
Participants continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes over the next few years. Participants generally continued to expect the growth rate of real GDP in 2019 to step down somewhat from the pace seen over 2018 to a rate closer to their estimates of longer-run growth, with a few participants commenting that waning fiscal stimulus was expected to contribute to the step-down. Several participants commented that they had nudged down their outlooks for output growth since the December meeting, citing a softening in consumer or business sentiment, a reduction in the outlook for foreign economic growth, or the tightening in financial conditions that had occurred in recent months.
In their discussion of the household sector, participants noted that recent data on spending had been strong, supported by a strong job market and rising incomes. A couple of participants commented that contacts in their Districts remained optimistic about consumer spending. However, some participants noted the recent softening in surveys of consumer sentiment. Participants observed that the recent partial federal government shutdown had presented a significant hardship for many families. A few participants also pointed to continued weakness in the housing sector, which was attributed in part to concerns about affordability among potential homebuyers.
Participants noted that growth of business fixed investment had moderated from its rapid pace earlier last year. Some participants highlighted that recent surveys of business sentiment or District contacts had indicated some weakening in optimism or confidence about the economic outlook, though available indicators suggested that the level of business sentiment had remained high. Concerns about the economic outlook were variously attributed to uncertainty or worries about slowing global economic growth, including in Europe and China; trade policy; waning fiscal policy stimulus; and the partial government shutdown. Manufacturing contacts in a number of Districts indicated that such factors were causing them to delay or defer capital expenditures. In addition, a few participants noted that recent declines in oil or gasoline prices had damped plans for capital expenditures in the energy sector. A few participants observed that conditions in the agricultural sector remained difficult, citing large inventories of agricultural commodities, uncertainty about international trade policies, and concerns regarding low prices of commodities and farmland. However, a few participants commented that business optimism had increased among contacts in their Districts, or that they were planning new capital expenditures.
Participants observed that both overall inflation and inflation for items other than food and energy remained near 2 percent on a 12-month basis. Participants continued to view inflation near the Committee’s symmetric 2 percent objective as the most likely outcome. Some participants noted that some factors, such as the decline in oil prices, slower growth and softer inflation abroad, or appreciation of the dollar last year, had held down some recent inflation readings and may continue to do so this year. In addition, many participants commented that upward pressures on inflation appeared to be more muted than they appeared to be last year despite strengthening labor market conditions and rising input costs for some industries.
In their discussion of indicators of inflation expectations, participants noted that market-based measures of inflation compensation had moved lower in recent months. Participants expressed a range of views in interpreting the decline in inflation compensation. On the one hand, that decline could stem from a decrease in expected inflation on the part of market participants. In that case, the current low levels of inflation compensation could suggest that inflation expectations are below the Committee’s 2 percent inflation objective. On the other hand, the decline in inflation compensation might reflect in large part declines in risk premiums or increased concerns about downside risks to the outlook for inflation. This interpretation was seen as consistent with the behavior of the most recent survey-based measures of expected inflation, which were little changed.
In their discussion of labor markets, participants agreed that conditions had continued to strengthen. Estimates of job gains in the December employment report had been strong, the unemployment rate had remained low, and the labor force participation rate had moved up. Several participants noted solid rates of hiring or other indicators of tight labor market conditions in their Districts. Some participants commented on recent indicators at the national or District levels as suggesting a pickup in wage growth. The pickup was attributed to tightening in national or District labor market conditions or to gains in the rate of productivity growth. Continued solid productivity growth was seen as a key factor necessary to support rising real wages over time.
Participants commented on a number of risks associated with their outlook for economic activity, the labor market, and inflation over the medium term. Participants noted that some risks to the downside had increased, including the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe, a rapid waning of fiscal policy stimulus, or a further tightening of financial market conditions. An increase in some foreign and domestic government policy uncertainties, including those associated with Brexit, an escalation in international trade policy tensions, and the potential for additional extended federal government shutdowns were also cited as downside risks. A few participants expressed concern that longer-run inflation expectations may be lower than levels consistent with the Committee’s 2 percent inflation objective. Several participants judged that risks that could lead to higher-than-expected inflation had diminished relative to downside risks. The potential that various sources of uncertainty might abate more quickly than expected was mentioned as a potential upside risk for the economic outlook.
In their discussion of financial developments, participants noted that although financial market conditions had not changed much, on net, over the intermeeting period, prices had been volatile and financial conditions were materially tighter than they had been several months ago, with lower equity prices and wider corporate risk spreads. Several participants also noted that the slope of the Treasury yield curve was unusually flat by historical standards, which in the past had often been associated with a deterioration in future macroeconomic performance. Participants noted that financial asset prices appeared to be sensitive to information regarding trade policy tensions, domestic fiscal and monetary policy, and global economic growth prospects. A couple of participants noted that the rise in credit spreads over recent months, if it were to persist, could restrain future economic activity. Participants agreed that it was important to continue to monitor financial market developments and assess the implications of these developments for the economic outlook.
Among those participants who commented on financial stability, a number expressed concerns about the elevated financial market volatility and the apparent decline in investors’ willingness to bear risk that occurred toward the end of last year. Although these conditions had eased somewhat in recent weeks, a couple of participants noted that the strain in financial markets might have persisted or spread if it had occurred during a period of less favorable macroeconomic conditions. A couple of participants highlighted the role that decreased liquidity at the end of the year appeared to play in exacerbating changes in financial market conditions. They emphasized the need to monitor financial market structures or practices that may contribute to strained liquidity conditions. A few participants highlighted the importance of ensuring that financial institutions were able to withstand adverse financial market events–for instance, by maintaining adequate levels of capital.
In their consideration of monetary policy at this meeting, participants judged that information received since December indicated that real economic activity had been rising at a solid rate, labor market conditions had continued to strengthen, and inflation had been near the Committee’s objective. Participants generally expected economic activity to continue expanding at a solid pace in the period ahead, with strong labor market conditions and inflation near 2 percent. At the time of the December meeting, the Committee had noted that it would continue to monitor global economic and financial developments and assess their implications for the economic outlook. Participants observed that since then, the economic outlook had become more uncertain. Financial market volatility had remained elevated over the intermeeting period, and, despite some easing since the December FOMC meeting, overall financial conditions had tightened since September. In addition, the global economy had continued to record slower growth, and consumer and business sentiment had deteriorated. The government policy environment, including trade negotiations and the recent partial federal government shutdown, was also seen as a factor contributing to uncertainty about the economic outlook.
Based on their current assessments, all participants expressed the view that it would be appropriate for the Committee to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. With regard to the Committee’s postmeeting statement, participants supported a proposed change in the forward guidance language that would replace the previous guidance referring to “some further gradual increases in the target range for the federal funds rate” with an indication that, in light of “global economic and financial developments and muted inflation pressures,” the Committee would “be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” Participants also supported a proposal to remove from the statement the characterization of risks to the economic outlook as “roughly balanced.”
Participants pointed to a variety of considerations that supported a patient approach to monetary policy at this juncture as an appropriate step in managing various risks and uncertainties in the outlook. With regard to the domestic economic picture, additional data would help policymakers gauge the trajectory of business and consumer sentiment, whether the recent softness in core and total inflation and inflation compensation would persist, and the effect of the tightening of financial conditions on aggregate demand. Information arriving in coming months could also shed light on the effects of the recent partial federal government shutdown on the U.S. economy and on the results of the budget negotiations occurring in the wake of the shutdown, including the possible implications for the path of fiscal policy. A patient approach would have the added benefit of giving policymakers an opportunity to judge the response of economic activity and inflation to the recent steps taken to normalize the stance of monetary policy. Furthermore, a patient posture would allow time for a clearer picture of the international trade policy situation and the state of the global economy to emerge and, in particular, could allow policymakers to reach a firmer judgment about the extent and persistence of the economic slowdown in Europe and China.
Participants noted that maintaining the current target range for the federal funds rate for a time posed few risks at this point. The current level of the federal funds rate was at the lower end of the range of estimates of the neutral policy rate. Moreover, inflation pressures were muted, and asset valuations were less stretched than they had been a few months earlier. Many participants suggested that it was not yet clear what adjustments to the target range for the federal funds rate may be appropriate later this year; several of these participants argued that rate increases might prove necessary only if inflation outcomes were higher than in their baseline outlook. Several other participants indicated that, if the economy evolved as they expected, they would view it as appropriate to raise the target range for the federal funds rate later this year.
Participants observed that a patient posture in these circumstances was consistent with their general approach to setting the stance of policy, in which they were importantly guided by the implications of incoming data for the economic outlook. Some participants noted that, while global economic and financial developments had been important factors leading to a patient monetary policy posture, those developments mattered because they affected assessments of the policy rate path most consistent with achievement of the Committee’s dual-mandate goals of maximum employment and price stability. Many participants observed that if uncertainty abated, the Committee would need to reassess the characterization of monetary policy as “patient” and might then use different statement language.
A few participants expressed concerns that in the current environment of increased uncertainty, the policy rate projections prepared as part of the Summary of Economic Projections (SEP) do not accurately convey the Committee’s policy outlook. These participants were concerned that, although the individual participants’ projections for the federal funds rate in the SEP reflect their individual views of the appropriate path for the policy rate conditional on the evolution of the economic outlook, at times the public had misinterpreted the median or central tendency of those projections as representing the consensus view of the Committee or as suggesting that policy was on a preset course. However, some other participants noted that the policy rate projections in the SEP are a valuable component of the overall information provided about the monetary policy outlook.
Source:
https://www.federalreserve.gov/monetarypolicy/fomcminutes20190130.htm
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