11 December 2019 FOMC Meeting Minutes: Will Keeping The Federal Funds Rate Low Encourage Risk Taking?

— this post authored by Steven Hansen

The 11 December 2019 meeting statement presented the actions taken. This post covers the economic discussion during this FOMC meeting between the members. An interesting quote regarding keeping the current federal funds rate for some time:

… participants regarded the current stance of monetary policy as likely to remain appropriate for a time as long as incoming information about the economy remained broadly consistent with the economic outlook. Of course, if developments emerged that led to a material reassessment of the outlook, the stance of policy would need to adjust in a way that fostered the Committee’s dual-mandate objectives ….

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 2022 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 are described in the Summary of Economic Projections (SEP), which is an addendum to these minutes.

Participants agreed that the labor market had remained strong over the intermeeting period and that economic activity had risen at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Al­though household spending had risen at a strong pace, business fixed investment and exports had remained weak. On a 12-month basis, overall inflation and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed.

Participants generally expected sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. This outlook reflected, at least in part, the support provided by the current stance of monetary policy. Nevertheless, global developments, related to both persistent uncertainty regarding international trade and weakness in economic growth abroad, continued to pose some risks to the outlook, and inflation pressures remained muted.

In their discussion of the household sector, participants agreed that spending had increased at a strong pace. They generally expected that consumption spending would likely remain on a firm footing, supported by strong labor market conditions, rising incomes, and solid consumer confidence. In addition, residential investment had continued to pick up, reflecting, in part, the effects of lower mortgage rates. Many participants commented that business contacts in consumer-related industries reported strong demand or that contacts were optimistic about the holiday retail spending season. However, some participants observed that recent data on retail sales or motor vehicle spending had decelerated slightly.

With respect to the business sector, participants saw trade developments and concerns about the global economic growth outlook as the main factors contributing to weak business investment and exports. Participants generally expected these factors to continue to damp business investment and exports. They expressed similar concerns about activity in manufacturing industries. A few participants noted that the current weakness in capital expenditures could lead to a slower pace of productivity growth in future years. A few others observed that businesses were diversifying their supply chains or investing in technology to adapt to persistent uncertainty regarding international trade, which might mitigate the effects of such uncertainty on future business spending.

A number of participants commented on challenges facing the energy and agriculture sectors. A few participants remarked that activity in the energy sector was especially weak, reflecting low petroleum prices, low profitability, and tight financing conditions for energy-producing firms. Several participants noted that the agricultural sector also faced a number of difficulties, including those associated with trade developments, weak export demand, and challenging financial positions for many farmers. A couple of participants noted that farm subsidies from the federal government were offsetting a portion of the financial strain on farmers.

Participants judged that conditions in the labor market remained strong, with the unemployment rate at a 50-year low, job gains remaining solid, and some measures of labor force participation increasing further. The unemployment rate was likely to remain low going forward, and various participants remarked that there were some indications that further strengthening in overall labor market conditions was possible without creating undesirable pressures on resources. In particular, a number of participants noted that the labor force participation rate could rise further still. Moreover, measures of wage growth had generally remained moderate. However, a few participants commented that increases in the labor force would likely moderate as slack in the labor market diminished. In addition, a couple of participants remarked that the preliminary benchmark revision released in August by the Bureau of Labor Statistics had indicated that payroll employment gains would likely show less momentum coming into this year once those revisions are incorporated in published data early next year. A couple of other participants thought it was important to better understand the quality of jobs being created. Business contacts in many Districts indicated continued strong labor demand, with firms reporting difficulties in finding qualified workers or broadening their recruiting to include traditionally marginalized groups. A number of participants noted that wage pressures were evident for some industries in their Districts, and a couple of participants commented that firms were responding to those pressures in a variety of ways, including investing in technology that could serve as a substitute for labor.

In their discussion of inflation developments, participants noted that recent readings on overall and core PCE inflation, measured on a 12-month change basis, had continued to run below 2 percent. Survey-based measures of longer-term inflation expectations were little changed, and market-based measures of inflation compensation remained low. A few participants commented on factors that may temporarily exert upward pressure on some measures of inflation in the coming months. Assessing all these factors, participants generally expected that inflation would return to the 2 percent objective as the economic expansion continued and resource utilization remained high. However, weakness abroad and subdued global inflation pressures were cited as sources of risk to this assessment. Participants who expressed less confidence that inflation would return promptly to the 2 percent objective commented that inflation had averaged less than 2 percent over the past several years even as resource utilization had increased or that global or technology-related factors were exerting downward pressure on inflation that could be difficult to overcome.

Participants also discussed risks regarding the outlook for economic activity. While many saw the risks as tilted somewhat to the downside, some risks were seen to have eased over recent months. In particular, there were some tentative signs that trade tensions with China were easing, and the probability of a no-deal Brexit was judged to have lessened further. In addition, there were indications that the prospects for global economic growth may be stabilizing. A number of participants observed that the domestic economy was showing resilience in the face of headwinds from global developments. Moreover, statistical models designed to gauge the probability of recession using financial market data, including those based on information from the Treasury yield curve, suggested that the likelihood of a recession occurring over the medium term had fallen noticeably in recent months. However, new uncertainties had emerged regarding trade policy with Argentina, Brazil, and France, and political tensions in Hong Kong persisted.

In their consideration of monetary policy at this meeting, participants judged that it would be appropriate to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective. As reflected in their SEP projections, participants regarded the current stance of monetary policy as likely to remain appropriate for a time as long as incoming information about the economy remained broadly consistent with the economic outlook. Of course, if developments emerged that led to a material reassessment of the outlook, the stance of policy would need to adjust in a way that fostered the Committee’s dual-mandate objectives.

A number of participants agreed that maintaining the current stance of monetary policy would give the Committee some time to assess the full effects on the economy of its policy decisions and communications over the course of this year along with other information bearing on the economic outlook. Participants also discussed how maintaining the current stance of policy for a time could be helpful for cushioning the economy from the global developments that have been weighing on economic activity and for returning inflation to the Committee’s symmetric objective of 2 percent. Participants generally expressed concerns regarding inflation continuing to fall short of 2 percent. Al­though a number of participants noted that some of the factors currently holding down inflation were likely to prove transitory, various participants were concerned that indicators were suggesting that the level of longer-term inflation expectations was too low.

A few participants raised the concern that keeping interest rates low over a long period might encourage excessive risk-taking, which could exacerbate imbalances in the financial sector. These participants offered various perspectives on the relationship between financial stability and policies that keep interest rates persistently low. They remarked that such policies could be inconsistent with sustaining maximum employment, could make the next recession more severe than otherwise, or could strengthen the case for the active use of macroprudential tools to guard against emerging imbalances.

Various participants remarked on issues related to the implementation of monetary policy, highlighting topics for further discussion at future meetings. Among the topics mentioned were the potential role of a standing repo facility in an ample-reserves regime, the setting of administered rates, and the composition of the Federal Reserve’s holdings of Treasury securities over the longer run.

Source

https://www.federalreserve.gov/monetarypolicy/fomcminutes20191211.htm

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