The FOMC minutes for the January meeting were a hawkish one. Many members expressed the view that it would be ‘appropriate’ to increase interest rate again ‘fairly soon’. A few of them suggested removing policy accommodation in ‘a timely manner’. However, there was no indication that it should arrive in as soon as March. Indeed, more clarity on the fiscal stimulus plan is needed before the members could decide on the timing of the rate hikes. While the general outlook to the economy remained upbeat (the description on the employment market was especially constructive),’a few’ members were concerned about downside risks to the inflation outlook.
On the timing of rate hikes, the minutes unveiled that ‘many participants’ judged that ‘it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the committee’s maximum-employment and inflation objectives increased’. It added that ‘a few participants’ believed that ‘continuing to remove policy accommodation in a timely manner, potentially at an upcoming meeting, would allow the Committee greater flexibility in responding to subsequent changes in economic conditions’. It appears that, during the January meeting, few members had strong conviction for a rate hike in March. Meanwhile, the minutes noted that ‘a few’ members remained concerned about downside risks to the inflation outlook. The members also briefly talked about the balance sheet strategy. They generally ‘agreed that the committee should begin discussions at upcoming meetings about the economic conditions that could warrant changes in the existing policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities, as well as how those changes would be implemented and communicated’.
As US President Donald Trump has yet to announce his fiscal expansion plan, the FOMC members emphasized their ‘considerable uncertainty’ about possible changes in ‘fiscal and other government policies’ as well as ‘about the timing and magnitude of the net effects of such changes on economic activity’. The members indicated that ‘the possibility of more expansionary fiscal policy as having increased the upside risks to their economic forecasts’. Some, however, suggested that ‘several potential changes in government policies could pose downside risks’.
The minutes revealed little news after the accompanying statement, released in early February, and Chair Yellen’s testimony last week. The encouraging economic developments, in particular the employment market, and the upbeat outlook of the members signals the median forecast of three rate hikes this year remains intact. However, March might still be a bit early for a move, as the members would like to have more clarity on the fiscal stimulus plan.