FOMC Minutes

May 18, 2016

Participants agreed that their ongoing assessments of the data and other incoming information, as well as the implications for the outlook, would determine the timing and pace of future adjustments to the stance of monetary policy. Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June. Participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting. Several participants were concerned that the incoming information might not provide sufficiently clear signals to determine by mid-June whether an increase in the target range for the federal funds rate would be warranted. Some participants expressed more confidence that incoming data would prove broadly consistent with economic conditions that would make an increase in the target range in June appropriate. Some participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments.

Minutes from the FOMC meeting of April 26-27 have a more hawkish tone than expected as attested by the above critical excerpt.  U.S. monetary conditions are currently actually looser than in mid-December when the first and so far only 25-basis point federal funds hike of this cycle were engineered. Since then the trade-weighted dollar has depreciated around 4.5%, and the 10-year Treasury yield has fallen 44 basis points on balance.  This week’s April CPI report revealed a 0.4% on-month increase in the total index, most in 38 months, so today’s minutes on the heels of the CPI data are well timed to stimulate speculation over the coming month that the FOMC could agree to a second rate increase in June.  That second observation would establish a tightening pace of 25 basis points every six months, which is indeed far more gradual than earlier cycles such as the doubling from 3% to 6% undertaken in the year to January 1995. 

Important data will be learned over the month ahead: May labor statistics, revised first-quarter growth, the April personal consumption price deflator, and how well world financial markets handle a heightened possibility of a June tightening.  Progress on the Fed’s two policy mandates, moreover, need to be balanced against an overall picture that hardly meets a definition of being in danger of evolving into an overheated situation.   U.S. real GDP expanded only 1.3% at an annual rate between mid-2015 and the end of March this year, decelerating from a pace of 3.9% in last year’s second quarter to 2.0% in 3Q, 1.4% in 4Q and just 0.5% in the first quarter of 2016.  The 12-month rise in the real personal spending deflator was 0.8% in March, down from 1.0% in February, and core PCE dropped to 1.6% from 1.7%.  The most compelling two reasons for the Fed to consider tightening have little to do with preventively acting against runaway inflation.  Foremost, the Fed needs to create greater scope to ease policy should the U.S. slip into recession, but at 25 basis points twice a year the upswing needs a couple more years before such a goal is met.  Secondly, ultra-low short-term interest rates maintained for an extensive period may cause long-term damage to money markets and raise the economy’s inability to handle rate increases.  Regrettably, that point of no return may already have been crossed.  What’s totally clear is that if the Fed boosts rates prematurely and pushes the economy into recession, far more lasting damage than good will have been done.  The immediate goal of rate normalization will have to be aborted, and future efforts at normalization will be even harder to achieve than the present one.  Yellen has consistently stressed that policy will be guided by data and the expectation of future economic trends, and that is the most sensible approach.  The minutes reflect thinking that is now several weeks old.  If the FOMC met today, the minutes would read somewhat differently, and when the June meeting comes around, the situation will be somewhat different from such at the time of the April meeting, now and when the rate was raised in December.  Those other three moments in time won’t count.  Only how things look at the time of the June meeting will influence the decision of that day.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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