FOMC Minutes

February 22, 2017

Minutes from the January 31/February 01 meeting of the Federal Open Market Committee policy review revealed little information that contradict general perceptions of the current thinking and contingent intentions of policymakers. The meeting was the first after the one in December that had raised the federal funds target by 25 basis points. Donald Trump had been president only 11 days when the meeting began. A further interest rate change had not been anticipated and was indeed not done.

The minutes support the view that the funds rate will be increased at least twice in 2017 and possibly more than that. A move at the March meeting is likely to get consideration. Several members favor an early move unless progress toward the inflation and employment goals suffered a setback. It hasn’t, and an early 2017 rate hike would create greater latitude for getting three hikes done during the year in a non-disruptive way, assuming economic trends evolve in such fashion that three or moves are favored over doing just two increase.

Given the high level of uncertainty surrounding U.S. economic assumptions, the FOMC was not in a position to know the ideal trajectory of the federal funds target when they met at the start of this month. One imperative is too establish a sufficiently high nominal central bank interest rate by the onset of the next economic downturn. The current business upswing will be eight years old four months from now. Although the funds rate ceiling now is just 0.75%, the neutral real interest rate is a lot lower this time than in previous cycles of monetary tightening. The committee is not discernibly behind or ahead of the curve, and the associated damage of acting too slows still looks likely to be more manageable than raising rates too hastily.

One message is that the Fed’s decision now are not a hostage to what changes that occur in other U.S. government policies — taxes, regulations, infrastructure policy, or immigration. The content, timing, and impact of these decisions remains very clear. Officials have from the start based their meeting-to-meeting decisions on a thorough examination of progress made toward reaching the inflation and labor market mandates and, equally important, the expectation of policymakers regarding future inflation and labor market slack based on all pertinent information. Whatever actions the Trump Administration takes will in time influence monetary policy first by impacting the Committee’s forecast and later by affecting inflation and growth. But monetary officials cannot put their job on hold until all that becomes clear.

The minutes identify both upside and downside risks to the baseline view of the likeliest path of the policy interest rate.

 They pointed to a number of risks that, if realized, might call for a different policy trajectory than they currently thought most likely to be appropriate. These included upside risks such as appreciably more expansionary fiscal policy or a more rapid buildup of inflationary pressures, as well as downside risks associated with a possible further appreciation of the dollar or financial vulnerabilities in some foreign economies, together with the proximity of the federal funds rate to the effective lower bound. Moreover, most participants continued to see heightened uncertainty regarding the size, composition, and timing of possible changes to fiscal and other government policies, and about their net effects on the economy and inflation over the medium term, and they thought some time would likely be required for the outlook to become clearer. A couple of participants argued that such uncertainty should not deter the Committee from taking further steps in the near term to remove monetary policy accommodation, because fiscal and other policies were only some of the many factors that were likely to influence progress toward the Committee’s dual-mandate objectives and thus the appropriate course of monetary policy. However, other participants cautioned against adjusting monetary policy in anticipation of policy proposals that might not be enacted or that, if enacted, might turn out to have different consequences for economic activity and inflation than currently anticipated.

Several judged that the risk of a sizable undershooting of the longer-run normal unemployment rate was high, particularly if economic growth was faster than currently expected. If that situation developed, the Committee might need to raise the federal funds rate more quickly than most participants currently anticipated to limit the buildup of inflationary pressures. However, with inflation still short of the Committee’s objective and inflation expectations remaining low, a few others continued to see downside risks to inflation or anticipated only a gradual return of inflation to the 2 percent objective as the labor market strengthened further. A couple of participants expressed concern that the Committee’s communications about a gradual pace of policy firming might be misunderstood as a commitment to only one or two rate hikes per year and stressed the importance of communicating that policy will respond to the evolving economic outlook as appropriate to achieve the Committee’s objectives. Participants also 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.

There was no indication of any thought yet about perhaps raising the interest rate target in increments other than 25 basis points or doing intra-meeting changes to the policy rate. The dollar is an indirect policy influence, but there is no sense of it being a problem yet.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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