Some Revealing Excerpts from May 2-3 FOMC Minutes

May 24, 2017

The excerpts below lend credence to rising expectations that the federal funds rate target will undergo its fourth increase at the June meeting. At the same time, great emphasis is placed on ensuring that rate normalization proceed at a gradual pace. The same feeling surrounds balance sheet reduction, which also will proceed at a very slow pace. And in each case, the end point for the interest rate and the size of the balance sheet will fall well short of what would have constituted a pre-Great Recession normal. That means a lower interest rate peak than attained in previous tightening cycles and a considerably larger balance sheet than existed before the Fed embarked on quantitative stimulus.

Note, too, from the first passage that a changed presumption of the dollar’s future strength was a key driver of a modification in the committee’s view on future economic growth.

Beyond the near term, the forecast for real GDP growth was a little stronger, on net, than in the previous projection, mostly due to the effect of a somewhat lower assumed path for the exchange value of the dollar.

Most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the Committee to take another step in removing some policy accommodation. A number of participants pointed out that clarification of prospective fiscal and other policy changes would remove one source of uncertainty for the economic outlook.

Some participants noted that core PCE price inflation had been running below the Committee’s objective for overall inflation for the past eight years and that it was important to return inflation to 2 percent, or that the public’s longer-term inflation expectations may have fallen somewhat, and that a gradual approach to tightening could help return expectations and inflation to 2 percent.

Several participants, however, pointed to conditions under which the Committee might need to consider a somewhat more rapid removal of monetary accommodation—for instance, if the unemployment rate fell appreciably further than currently projected, if wages increased more rapidly than expected, or if highly stimulative fiscal policy changes were to be enacted. In contrast, a couple of others judged that the Committee could withdraw monetary accommodation even more gradually than reflected in the medians of forecasts in the March Summary of Economic Projections, noting that slack might remain in the labor market or that inflation was not very sensitive to declines in the unemployment rate below its estimated longer-run normal level.

The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, primarily reflecting the staff’s assessment that monetary policy appeared to be better positioned to respond to large positive shocks to the economic outlook than to substantial adverse ones. However, the staff viewed the risks to the forecast as less pronounced than late last year, with both somewhat diminished risks to the foreign outlook and an increase in U.S. consumer and business confidence.

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



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