In the minutes from the FOMC meeting earlier this month, committee members remained upbeat on the U.S. economic outlook. Labor market and consumer spending were highlighted as two areas of strength, while a slowdown in residential and most recently business investment were noted as soft spots.  Based on incoming data, participants indicated that their view of the economic outlook was little changed, with above-trend growth expected to continue in the near-term.

A few participants indicated that uncertainty has increased recently and financial conditions have tightened. Despite this, risks to the outlook were still seen as balanced. On the downside, trade developments, appreciation of the U.S. dollar and high level of debt in nonfinancial business sector were referenced, but this was offset by high consumer confidence, still-accommodative financial conditions, and the potential for a greater-than-anticipated impact from fiscal stimulus.

Nearly all participants agreed that another increase in the fed funds rate “was likely due fairly soon” as long as the incoming data continues to evolve in line with expectations. Looking beyond the near-term, a few participants expressed uncertainty about the timing of future increases. Echoing Chairman Powell’s remarks yesterday, a couple of participants “noted that the federal funds rate may be near its neutral level” and further increases may “unduly slow” economic activity.

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Participants discussed potential changes to the post-meeting statement, particularly the reference the “further gradual increases” in the fed funds rate. Many participants felt that it may be appropriate to place greater emphasis on incoming economic data in the statement in order to convey the Committee’s flexible approach in determining the future course of monetary policy.

Key Implications

As far as economic outlook is concerned, these minutes were largely uneventful, however, the FOMC minutes contained a few interesting tidbits of information with respect to views on monetary policy. In particular, the Fed is clearly laying out the groundwork for a more flexible path of monetary policy. This means that data will be paramount in determining the future course of the fed funds rate, particularly in an environment of increased uncertainty.

Perhaps echoing the discussion that took place during the FOMC last meeting, in yesterday’s speech, Chairman Powell’s characterized the current level of the fed fund rate as “just below the broad range of estimates of the level that would be neutral” – a more dovish assessment than the one in his October remarks that the rate was “a long way from neutral.” His comments prompted a considerable market reaction, with bond yields falling as investors adjusted their expectations to fewer rate hikes in 2019.

Markets may have overreacted to Powell’s statement given that the current fed funds rate is, in fact, only slightly below the bottom of the range of FOMC members estimates (even as it is a fair bit further away from the median estimate). Nonetheless, we do see downside risk to that median estimate (last published in September). A hike in December is still very much in the cards, as confirmed by the November minutes, but, with PCE inflation running at just 1.8% year-on-year and FOMC forecasts for inflation likely to be revised down in the next Summary of Economic Projections accompanying the December announcement, the Fed does have the flexibility to proceed with more caution next year.

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