FOMC Minutes

April 8, 2015

Released minutes from the March 17-18 Federal Open Market Committee meeting revealed divided views regarding the pros and cons of hiking the federal funds rate target range of 0-0.25% as soon as June.  Among members then reluctant to tighten that early, concerns about the dollar and energy need to subside to reassure them that benefits would outweigh risks.  Also, needless to say, labor market conditions mustn’t deteriorate. 

Further improvement in the labor market, a stabilization of energy prices, and a leveling out of the foreign exchange value of the dollar were all seen as helpful in establishing confidence that inflation would turn up. Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting. However,others anticipated that the effects of energy price declines and the dollar’s appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016.

Dollar:  A rising dollar depresses import prices, export competitiveness and inflation.  FOMC members will be influenced by the trade-weighted dollar’s performance, not one or two bilateral dollar values.  Between the March meeting and the Good Friday holiday, the trade-weighted dollar settled back 2.7%, but that loss has been trimmed slightly in the past few sessions.  If the dollar is only marginally weaker than now when the FOMC meets in June, the currency will probably not be deal-breaker in the decision to begin normalization.

Oil:  West Texas Intermediate oil cost $45.19 at the close on March 17, more than 10% weaker than now.  Like the dollar, oil movements since the March meeting are consistent with overcoming resistance to a June interest rate cut.

Labor Market Conditions:  The rise of jobs in March of only 126K represented the first drop below 200K since February 2014.  Other aspects of the Labor Department report were healthier, such as an unchanged 5.5% jobless rate and accelerated growth in average hourly earnings of 0.3% on month and 2.1% on year.  There will be two more labor market surveys to assess before the June meeting.

Wild Card:  Fed officials aren’t worried about the direct effect of a 25-basis point hike in overnight money rates but rather the response of other markets, particularly Treasury yields, to the beginning of normalization.  Long-term interest rates aren’t staying low because the markets are betting against a June move but rather because extraordinarily low bond yields in Europe and Japan and the drumbeat of monetary policy easings by central banks in emerging markets.  If global trends remain skewed to the downside, June could afford Fed officials a reasonably safe backdrop to hike U.S. short-term rates without producing a multiple jump in rates further down the U.S. maturity spectrum. 

What about subsequent rate tightenings?:  A communications campaign is already underway by Fed officials to convince investors that their focus should be less on the timing of the first move and more on the path toward rate nomalization that follows.  Their message is that the pace will be driven by data but also that officials will err on the side of a very gradual process.  They do not want to repeat the experience of 1994-95 or 2004-06.  Mentioning that some FOMC members will to delay any move until 2016 is meant not to engender expectations that policy will not be tightened in 2015 to to persuade markets that the first one or two rate increases are not going to produce a sky-is-falling transformation of market sentiment.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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