— this post authored by Steven Hansen
The 20 March 2019 meeting statement presented the actions taken. This post covers the economic discussion during this FOMC meeting between the members (minutes were released yesterday). An interesting quote:
… A few participants observed that an economic deterioration in the United States, if it occurred, might be amplified by significant debt service burdens for many firms …
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.
I find it interesting that the markets only seem to care about the federal funds rate – which these minutes indicate that the federal funds rate will remain unchanged as long as the participant’s economic forecasts come true. Hey boys and girls, the FOMC views are all over the place – and their complete miss-forecasts of inflation going back well over 10 years – tell you that the FOMC is unable to quantify inflation pressures:
Participants noted that the latest readings on overall inflation had been somewhat softer than expected. However, participants observed that these readings largely reflected the effects of earlier declines in crude oil prices and that core inflation remained near 2 percent. Most participants, while seeing inflation pressures as muted, expected the overall rate of inflation to firm somewhat and to be at or near the Committee’s longer-run objective of 2 percent over the next few years. Many participants indicated that, while inflation had been close to 2 percent last year, it was noteworthy that it had not shown greater signs of firming in response to strong labor market conditions and rising nominal wage growth, as well as to the short-term upward pressure on prices arising from tariff increases. Low rates of price increases in sectors of the economy that were not cyclically sensitive were cited by a couple of participants as one reason for the recent easing in inflation. A few participants observed that the pickup in productivity growth last year was a welcome development helping to bolster potential output and damp inflationary pressures.
In their discussion of indicators of inflation expectations, participants noted that market-based measures of inflation compensation had risen modestly over the intermeeting period, although they remained low. A couple of participants stressed that recent readings on survey measures of inflation expectations were also still at low levels. Several participants suggested that longer-term inflation expectations could be at levels somewhat below those consistent with the Committee’s 2 percent inflation objective and that this might make it more difficult to achieve that objective on a sustained basis.
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
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2019 through 2021 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate. The longer-run projections represented each participant’s assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections (SEP), which is an addendum to these minutes.
Participants agreed that information received since the January meeting indicated that the labor market had remained strong but that growth of economic activity had slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Recent indicators pointed to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation had declined, largely as a result of lower energy prices; inflation for items other than food and energy remained near 2 percent. On balance, market-based measures of inflation compensation had remained low in recent months, and 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. Underlying economic fundamentals continued to support sustained expansion, and most participants indicated that they did not expect the recent weakness in spending to persist beyond the first quarter. Nevertheless, participants generally expected the growth rate of real GDP this year to step down from the pace seen over 2018 to a rate at or modestly above their estimates of longer-run growth. Participants cited various factors as likely to contribute to the step-down, including slower foreign growth and waning effects of fiscal stimulus. A number of participants judged that economic growth in the remaining quarters of 2019 and in the subsequent couple of years would likely be a little lower, on balance, than they had previously forecast. Reasons cited for these downward revisions included disappointing news on global growth and less of a boost from fiscal policy than had previously been anticipated.
In their discussion of the household sector, participants noted that softness in consumer spending had contributed importantly to the projected slowing in economic growth in the current quarter. Many participants pointed to the weakness in retail sales in December as notable, although they recognized that the data for January had shown a partial recovery in retail sales. Participants also observed that much of the recent softness likely reflected temporary factors, such as the partial federal government shutdown and December’s volatility in financial markets, and that consumer sentiment had recovered after these factors had receded. Consequently, many participants expected consumer spending to proceed at a stronger pace in coming months, supported by favorable underlying factors, including a strong labor market, solid growth in household incomes, improvements in financial conditions and in households’ balance sheet positions, and upbeat consumer sentiment. Participants noted, however, that the continued softness in the housing sector was a concern.
Participants also commented on the apparent slowing of growth in business fixed investment in the first quarter. Factors cited as consistent with the recent softness in investment growth included downward revisions in forecasts of corporate earnings; relatively low energy prices that provided less incentive for new drilling and exploration; flattening capital goods orders; reports from contacts of softer export sales and of weaker economic activity abroad; elevated levels of uncertainty about government policies, including trade policies; and the likely effect of recent financial market volatility on business sentiment. However, many participants pointed to signs that the weakness in investment would likely abate. Some contacts in manufacturing and other sectors reported that business conditions were favorable, with strong demand for labor, business sentiment had recovered from its recent decline, and recent reductions in mortgage interest rates would provide some support for construction activity. Agricultural activity remained weak in various areas of the country, with the weakness in part reflecting adverse effects of trade policy on commodity prices. Recent widespread severe flooding had also adversely affected the agricultural sector.
Participants noted that the latest readings on overall inflation had been somewhat softer than expected. However, participants observed that these readings largely reflected the effects of earlier declines in crude oil prices and that core inflation remained near 2 percent. Most participants, while seeing inflation pressures as muted, expected the overall rate of inflation to firm somewhat and to be at or near the Committee’s longer-run objective of 2 percent over the next few years. Many participants indicated that, while inflation had been close to 2 percent last year, it was noteworthy that it had not shown greater signs of firming in response to strong labor market conditions and rising nominal wage growth, as well as to the short-term upward pressure on prices arising from tariff increases. Low rates of price increases in sectors of the economy that were not cyclically sensitive were cited by a couple of participants as one reason for the recent easing in inflation. A few participants observed that the pickup in productivity growth last year was a welcome development helping to bolster potential output and damp inflationary pressures.
In their discussion of indicators of inflation expectations, participants noted that market-based measures of inflation compensation had risen modestly over the intermeeting period, although they remained low. A couple of participants stressed that recent readings on survey measures of inflation expectations were also still at low levels. Several participants suggested that longer-term inflation expectations could be at levels somewhat below those consistent with the Committee’s 2 percent inflation objective and that this might make it more difficult to achieve that objective on a sustained basis.
In their discussion of the labor market, participants cited evidence that conditions remained strong, including the very low unemployment rate, a further increase in the labor force participation rate, a low number of layoffs, near-record levels of job openings and help-wanted postings, and solid job gains, on average, in recent months. Participants observed that, following strong job gains in January, there had been little growth in payrolls in February, although a few participants pointed out that the February reading had likely been affected by adverse weather conditions. A couple of participants noted that, over the medium term, some easing in payroll growth was to be expected as economic growth slowed to its longer-run trend rate. Reports from business contacts predominantly pointed to continued strong labor demand, with firms offering both higher wages and more nonwage benefits to attract workers. Economy-wide wage growth was seen as being broadly consistent with recent rates of labor productivity growth and with inflation of 2 percent. A few participants cited the combination of muted inflation pressures and expanding employment as a possible indication that some slack remained in the labor market.
Participants commented on a number of risks associated with their outlook for economic activity. A few participants noted that there remained a high level of uncertainty associated with international developments, including ongoing trade talks and Brexit deliberations, although a couple of participants remarked that the risks of adverse outcomes were somewhat lower than in January. Other downside risks included the possibility of sizable spillovers from a greater-than-expected economic slowdown in Europe and China, persistence of the softness in spending, or a sharp falloff in fiscal stimulus. A few participants observed that an economic deterioration in the United States, if it occurred, might be amplified by significant debt service burdens for many firms. Participants also mentioned a number of upside risks regarding the outlook for economic activity, including outcomes in which various sources of uncertainty were resolved favorably, consumer and business sentiment rebounded sharply, or the recent strengthening in labor productivity growth signaled a pickup in the underlying trend. Upside risks to the outlook for inflation included the possibility that wage pressures could rise unexpectedly and lead to greater-than-expected price increases.
In their discussion of financial developments, participants observed that a good deal of the tightening over the latter part of last year in financial conditions had since been reversed; Federal Reserve communications since the beginning of this year were seen as an important contributor to the recent improvements in financial conditions. Participants noted that asset valuations had recovered strongly and also discussed the decline that had occurred in recent months in yields on longer-term Treasury securities. Several participants expressed concern that the yield curve for Treasury securities was now quite flat and noted that historical evidence suggested that an inverted yield curve could portend economic weakness; however, their discussion also noted that the unusually low level of term premiums in longer-term interest rates made historical relationships a less reliable basis for assessing the implications of the recent behavior of the yield curve. Several participants pointed to the increased debt issuance and higher leverage of nonfinancial corporations as a development that warranted continued monitoring.
In their discussion of monetary policy decisions at the current meeting, participants agreed that it would be appropriate to maintain the current target range for the federal funds rate at 2-1/4 to 2-1/2 percent. Participants judged that the labor market remained strong, but that information received over the intermeeting period, including recent readings on household spending and business fixed investment, pointed to slower economic growth in the early part of this year than in the fourth quarter of 2018. Despite these indications of softer first-quarter growth, participants generally expected economic activity to continue to expand, labor markets to remain strong, and inflation to remain near 2 percent. Participants also noted significant uncertainties surrounding their economic outlooks, including those related to global economic and financial developments. In light of these uncertainties as well as continued evidence of muted inflation pressures, participants generally agreed that a patient approach to determining future adjustments to the target range for the federal funds rate remained appropriate. Several participants observed that the characterization of the Committee’s approach to monetary policy as “patient” would need to be reviewed regularly as the economic outlook and uncertainties surrounding the outlook evolve. A couple of participants noted that the “patient” characterization should not be seen as limiting the Committee’s options for making policy adjustments when they are deemed appropriate.
With regard to the outlook for monetary policy beyond this meeting, a majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year. Several of these participants noted that the current target range for the federal funds rate was close to their estimates of its longer-run neutral level and foresaw economic growth continuing near its longer-run trend rate over the forecast period. Participants continued to emphasize that their decisions about the appropriate target range for the federal funds rate at coming meetings would depend on their ongoing assessments of the economic outlook, as informed by a wide range of data, as well as on how the risks to the outlook evolved. Several participants noted that their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data and other developments. Some participants indicated that if the economy evolved as they currently expected, with economic growth above its longer-run trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year.
Several participants expressed concerns that the public had, at times, misinterpreted the medians of participants’ assessments of the appropriate level for the federal funds rate presented in the SEP as representing the consensus view of the Committee or as suggesting that policy was on a preset course. Such misinterpretations could complicate the Committee’s communications regarding its view of appropriate monetary policy, particularly in circumstances when the future course of policy is unusually uncertain. Nonetheless, several participants noted that the policy rate projections in the SEP are a valuable component of the overall information provided about the monetary policy outlook. The Chair noted that he had asked the subcommittee on communications to consider ways to improve the information contained in the SEP and to improve communications regarding the role of the federal funds rate projections in the SEP as part of the policy process.
Participants also discussed alternative interpretations of subdued inflation pressures in current economic circumstances and the associated policy implications. Several participants observed that limited inflationary pressures during a period of historically low unemployment could be a sign that low inflation expectations were exerting downward pressure on inflation relative to the Committee’s 2 percent inflation target; in addition, subdued inflation pressures could indicate a less tight labor market than suggested by common measures of resource utilization. Consistent with these observations, several participants noted that various indicators of inflation expectations had remained at the lower end of their historical range, and a few participants commented that they had recently revised down their estimates of the longer-run unemployment rate consistent with 2 percent inflation. In light of these considerations, some participants noted that the appropriate response of the federal funds rate to signs of labor market tightening could be modest provided that signs of inflation pressures continued to be limited. Some participants regarded their judgments that the federal funds rate was likely to remain on a very flat trajectory as reflecting other factors, such as low estimates of the longer-run neutral real interest rate or risk-management considerations. A few participants observed that the appropriate path for policy, insofar as it implied lower interest rates for longer periods of time, could lead to greater financial stability risks. However, a couple of these participants noted that such financial stability risks could be addressed through appropriate use of countercyclical macroprudential policy tools or other supervisory or regulatory tools.
Source:
https://www.federalreserve.gov/monetarypolicy/fomcminutes20190320.htm
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