FOMC participants remained upbeat on the U.S. economic outlook, noting little change from previous views. A few saw activity coming in stronger than expected.
Risks to the outlook were seen as balanced. On the downside, trade developments, divergence of growth prospects and stresses in emerging markets were referenced, but this was offset by high consumer confidence, accommodative financial conditions, and the potential for a greater-than-anticipated impact from fiscal stimulus.
Discussion around the signal coming from the yield curve continued. While participants recognized that it may signal an increased risk of recession, they also noted that it may also be distorted by low term premia, influenced in part by central bank purchases.
Almost all participants agreed to remove the reference to monetary policy remaining “accommodative” with discussants noting that the current rate “would still be below all of the estimates of its longer-run level.”
In considering how high to take rates, a few participants noted that policy would likely have to become restrictive for a time, while a number argued for pushing above the estimated long-run rate in order to avoid overshooting inflation or contributing to financial imbalances. This is consistent with the median projection for the federal funds rate rising above the longer-term dot by 2020.
Key Implications
The key message in these minutes, as well as that contained in most Fed communication, is that the FOMC will continue to hike rates at a gradual pace (read once a quarter) as long as the economy continues to perform strongly and inflation remains close to target.
The Fed ditched forward guidance in this meeting. The minutes affirmed that this is less of a signal of a change in expectations for future rates and more of a feeling that forward guidance had outlived its usefulness. The Powell-led Fed appears more sensitive to the level of uncertainty with equilibrium concepts such as the long-run neutral level of interest rates and is cautious in communicating a “false sense of precision” in these estimates.
The move up in yields in recent weeks appears to be in line with most FOMC members that rates will have to move above neutral (at least temporarily) in the coming years. As it always is, the performance of inflation will remain central to this debate.
