Comments on the FOMC Minutes from November 7-8

November 29, 2018

FOMC minutes released today suggest a lesser shift in Fed policy intentions that markets perhaps assumed after yesterday’s speech by Chairman Powell. His remark regarding the federal funds rate perhaps now only being slightly lower than rate neutrality is ascribed in these minutes to just a few committee participants.

A few participants, while viewing further gradual increases in the target range of the federal funds rate as likely to be appropriate,
expressed uncertainty about the timing of such increases. A couple of participants noted that the federal funds rate might currently be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put
downward pressure on inflation and inflation expectations.

A fourth hike in 2018 at the December meeting seemingly was the expectations of a majority of voting members when they met in November.

Almost all participants expressed the view that another increase in
the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations.

Movements in the dollar, which more often than not get no mention in FOMC minutes, were cited this time. To wit, appreciation was cited as a potential dampening factor on both inflation and growth. “Some participants viewed economic and financial developments abroad, including the possibility of further appreciation of the U.S. dollar, as posing downside risks for domestic economic growth and inflation.” From November 8th through last Friday, the Fed’s trade-weighted dollar index only climbed 0.6%, however.

A final take-away of mine is that future policy decisions, when all is said and done, will be data-driven. That’s not a novel assertion for the Fed or any other central bank trying to project policy independence. But language used until now that suggests a likely gradual upward path in the federal funds target is to some extent at odds with having data-driven policy making and no pre-announcement of future rate changes. Obviously, a 2-2.25% rate target is closer to neutrality than the rate level a year ago or two years ago. Eliminating language that projects gradual increases in the future doesn’t necessarily eliminate the possibility of more increases. Doing so merely acknowledges that increases intended mainly to achieve a more neutral policy stance – that is one that neither promotes faster or slower growth – is no longer necessary. But if a 2-2.25% interest rate coexists with either a widening positive output gap or accelerating inflation at or above target, there will be other reasons to justify tightening additionally.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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