–Wanted to Avoid ‘Any Appearance of Following Pre-Set Course’
–Meandering Discussion Struggles for Consensus; Saw ‘Absence of Clarity’
–‘Uncertainty’ and ‘Uncertainties’ Make Frequent Appearances
By Denny Gulino
WASHINGTON (MaceNews) – The view that the top Federal Reserve policymakers are as confused as everyone else in an environment of sharply conflicting signals – strong domestic jobs versus massively negative yields elsewhere – was confirmed by the minutes of the most recent FOMC meeting published Wednesday.
The words “uncertainty” and “uncertainties” dotted the views of the meeting’s participants as recounted in the document and missing throughout was any hint of commitment to even one more rate cut, let alone a string of them extending into the middle of next year.
The discourse appeared to broaden the Federal Open Market Committee’s stance to not only “data” dependency and to a wide range of “circumstance” dependency that has the policymakers looking over their shoulders at other central banks, other economies and an eccentric White House, without much of a clue what’s coming next.
The wording of the participants’ conclusions were as tentative and open ended as any ever seen from what St. Louis Fed President James Bullard recently described as an apolitical group of technocrats trying to find their way.
“A number of participants suggested that the nature of many of the risks they judged to be weighing on the economy, and the absence of clarity regarding when those risks might be resolved, highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook,” the minutes said.
The latest minutes were a case study in decisionmaking in the midst of a fog of facts and counter currents. Was low inflation “transitory” when disinflation internationally was becoming a permanent feature? Was U.S. business optimism largely dependent on a belief the Fed was already embarked on a series of accommodative moves? In other words, were Fed policymakers looking in the mirror for signals? Was a mid-course “recalibration” actually a new path?
[The minutes’ profusion of “uncertainties” did not dent the day’s optimism that elevated stocks. The S&P 500 ended the trading day up 0.8%.]
The section of the FOMC minutes devoted to the discussion of the participants follows, with boldfacing emphasis added:
Participants’ Views on Current Conditions and the Economic Outlook
Participants agreed that the labor market had remained strong over the intermeeting period and that economic activity had risen at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Although growth of household spending had picked up from earlier in the year, growth of business fixed investment had been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed.
Participants continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. This outlook was predicated on financial conditions that were more accommodative than earlier this year. More accommodative financial conditions, in turn, partly reflected market reaction to the downward adjustment through the course of the year in the Committee’s assessment of the appropriate path for the target range of the federal funds rate in light of weak global economic growth, trade policy uncertainty, and muted inflation pressures.
Participants generally noted that incoming data over the intermeeting period had been largely positive and that the economy had been resilient in the face of ongoing global developments. The economy continued to expand at a moderate pace, and participants generally expected GDP growth to slow a bit to around its estimated potential rate in the second half of the year. However, participants also observed that global economic growth had been disappointing, especially in China and the euro area, and that trade policy uncertainty, although waning some over the intermeeting period, remained elevated and looked likely to persist. Furthermore, inflation pressures continued to be muted, notwithstanding the firming in the overall and core PCE price indexes in the three months ending in June relative to earlier in the year.
In their discussion of the business sector, participants generally saw uncertainty surrounding trade policy and concerns about global growth as continuing to weigh on business confidence and firms’ capital expenditure plans. Participants generally judged that the risks associated with trade uncertainty would remain a persistent headwind for the outlook, with a number of participants reporting that their business contacts were making decisions based on their view that uncertainties around trade were not likely to dissipate anytime soon. Some participants observed that trade uncertainties had receded somewhat, especially with the easing of trade tensions with Mexico and China. Several participants noted that, over the intermeeting period, business sentiment seemed to improve a bit and commented that the data for new capital goods orders had improved. Some participants expressed the view that the effects of trade uncertainty had so far been modest and referenced reports from business contacts in their Districts that investment plans were continuing, though with a more cautious posture.
Participants also discussed developments across the manufacturing, agriculture, and energy sectors of the U.S. economy. Manufacturing production had declined so far this year, dragged down in part by weak real exports, the ongoing global slowdown, and trade uncertainties. Several participants noted ongoing challenges in the agricultural sector, including those associated with increased trade uncertainty, weak export demand, and the effects of wet weather and severe flooding. A couple of participants commented on the decline in energy prices since last fall and the associated reduction in economic activity in the energy sector.
Participants commented on the robust pace of consumer spending. Noting the important role that house-hold spending was currently playing in supporting the expansion, participants judged that household spending would likely continue to be supported by strong labor market conditions, rising incomes, and upbeat consumer sentiment. A few participants noted that the continued softness in residential investment was a concern, and that the expected boost to housing activity from the decline in mortgage rates since last fall had not yet materialized. In contrast, a couple of participants reported that some recent indicators of housing activity in their Districts had been somewhat more positive of late.
In their discussion of the labor market, participants judged that conditions remained strong, with the unemployment rate near historical lows and continued solid job gains, on average, in recent months. Job gains in June were stronger than expected, following a weak reading in May. Looking ahead, participants expected the labor market to remain strong, with the pace of job gains slower than last year but above what is estimated to be necessary to hold labor utilization steady. Reports from business contacts pointed to continued strong labor demand, with many firms reporting difficulty finding workers to meet current demand. Several participants reported seeing notable wage pressures for lower-wage workers. However, participants viewed overall wage growth as broadly consistent with the modest average rates of labor productivity growth in recent years and, consequently, as not exerting much upward pressure on inflation. Several participants remarked that there seemed to be little sign of overheating in labor markets, citing the combination of muted inflation pressures and moderate wage growth.
Regarding inflation developments, some participants stressed that, even with the firming of readings for consumer prices in recent months, both overall and core PCE price inflation rates continued to run below the Committee’s symmetric 2 percent objective; the latest reading on the 12-month change in the core PCE price index was 1.6 percent. Furthermore, continued weakness in global economic growth and ongoing trade tensions had the potential to slow U.S. economic activity and thus further delay a sustained return of inflation to the 2 percent objective. Many other participants, however, saw the recent inflation data as consistent with the view that the lower readings earlier this year were largely transitory, and noted that the trimmed mean measure of PCE price inflation constructed by the Federal Reserve Bank of Dallas was running around 2 percent. A few participants noted differences in the behavior of measures of cyclical and acyclical components of inflation. By some estimates, the cyclical component of inflation continued to firm; the acyclical component, which appeared to be influenced by sectoral and technological changes, was largely responsible for the low level of inflation and not likely to respond much to monetary policy actions. In their discussion of the outlook for inflation, participants generally anticipated that with appropriate policy, inflation would move up to the Committee’s 2 percent objective over the medium term. However, market-based measures of inflation compensation and some survey measures of consumers’ inflation expectations remained low, although they had moved up some of late. A few participants remarked that inflation expectations appeared to be reasonably well anchored at levels consistent with the Committee’s 2 percent inflation objective. However, some participants stressed that the prolonged shortfall in inflation from the long-run goal could cause inflation expectations to drift down – a development that might make it more difficult to achieve the Committee’s mandated goals on a sustained basis, especially in the current environment of global disinflationary pressures. A couple of participants observed that, although some indicators of longer-term inflation expectations, like TIPS-based inflation compensation and the Michigan survey measure, had not changed substantially this year, on net, they were notably lower than their levels several years ago.
Participants generally judged that downside risks to the outlook for economic activity had diminished somewhat since their June meeting. The strong June employment report suggested that the weak May payroll figures were not a precursor to a more material slowdown in job growth. The agreement between the United States and China to resume negotiations appeared to ease trade tensions somewhat. In addition, many participants noted that the recent agreement on the federal debt ceiling and budget appropriations substantially reduced near-term fiscal policy uncertainty. Moreover, the possibility of favorable outcomes of trade negotiations could be a factor that would provide a boost to economic activity in the future. Still, important downside risks persisted. In particular, participants were mindful that trade tensions were far from settled and that trade uncertainties could intensify again. Continued weakness in global economic growth remained a significant downside risk, and some participants noted that the likelihood of a no-deal Brexit had increased.
In their discussion of financial market developments, participants observed that financial conditions remained supportive of economic growth, with borrowing rates low and stock prices near all-time highs. Participants observed that current financial conditions appeared to be premised importantly on expectations that the Federal Reserve would ease policy to help offset the drag on economic growth stemming from the weaker global outlook and uncertainties associated with international trade as well as to provide some insurance to address various downside risks.
Participants also discussed the decline in yields on longer-term nominal Treasury securities in recent months. A few participants expressed the concern that the inversion of the Treasury yield curve, as evidenced by the 10-year yield falling below the 3-month yield, had persisted for about two months, which could indicate that market participants anticipated weaker economic conditions in the future and that the Federal Reserve would soon need to lower the federal funds rate substantially in response. The longer-horizon real forward rate implied by TIPS had also declined, suggesting that the longer-run normal level of the real federal funds rate implicit in market prices was lower. Among those participants who commented on financial stability, most highlighted recent credit market developments, the elevated valuations in some asset markets, and the high level of nonfinancial corporate indebtedness. Several participants noted that high levels of corporate debt and leveraged lending posed some risks to the outlook. A few participants discussed the fast growth of private credit markets – a sector not subject to the same degree of regulatory scrutiny and requirements that applies in the banking sector and commented that it was important to monitor this market. Several participants observed that valuations in equity and corporate bond markets were near all-time highs and that CRE valuations were also elevated. A couple of participants noted that the low level of Treasury yields – a factor seen as supporting asset prices across a range of markets – was a potential source of risk if yields moved sharply higher. However, these participants judged that in the near term, such risks were small in light of the monetary policy outlooks in the United States and abroad and generally subdued inflation. A few participants expressed the concern that capital ratios at the largest banks had continued to fall at a time when they should ideally be rising and that capital ratios were expected to decline further. Another view was that financial stability risks at present are moderate and that the largest banks would continue to maintain very substantial capital cushions in light of a range of regulatory requirements, including rigorous stress tests. In their discussion of monetary policy decisions at this meeting, those participants who favored a reduction in the target range for the federal funds rate pointed to three broad categories of reasons for supporting that action.
- First, while the overall outlook remained favorable, there had been signs of deceleration in economic activity in recent quarters, particularly in business fixed investment and manufacturing. A pronounced slowing in economic growth in overseas economies- perhaps related in part to developments in, and uncertainties surrounding, international trade – appeared to be an important factor in this deceleration. More generally, such developments were among those that had led most participants over recent quarters to revise down their estimates of the policy rate path that would be appropriate to promote maximum employment and stable prices.
- Second, a policy easing at this meeting would be a prudent step from a risk-management perspective. Despite some encouraging signs over the intermeeting period, many of the risks and uncertainties surrounding the economic outlook that had been a source of concern in June had remained elevated, particularly those associated with the global eco-nomic outlook and international trade. On this point, a number of participants observed that policy authorities in many foreign countries had only limited policy space to support aggregate demand should the downside risks to global economic growth be realized.
- Third, there were concerns about the outlook for inflation. A number of participants observed that overall inflation had continued to run below the Committee’s 2 percent objective, as had inflation for items other than food and energy. Several of these participants commented that the fact that wage pressures had remained only moderate despite the low unemployment rate could be a sign that the longer-run normal level of the unemployment rate is appreciably lower than often assumed. Participants discussed indicators for longer-term inflation expectations and inflation compensation. A number of them concluded that the modest increase in market-based measures of inflation compensation over the intermeeting period likely reflected market participants’ expectation of more accommodative monetary policy in the near future; others observed that, while survey measures of inflation expectations were little changed from June, the level of expectations by at least some measures was low. Most participants judged that long-term inflation expectations either were already below the Committee’s 2 percent goal or could decline below the level consistent with that goal should there be a continuation of the pattern of inflation coming in persistently below 2 percent.
A couple of participants indicated that they would have preferred a 50 basis point cut in the federal funds rate at this meeting rather than a 25 basis point reduction. They favored a stronger action to better address the stubbornly low inflation rates of the past several years, recognizing that the apparent low sensitivity of inflation to levels of resource utilization meant that a notably stronger real economy might be required to speed the return of inflation to the Committee’s inflation objective. Several participants favored maintaining the same target range at this meeting, judging that the real economy continued to be in a good place, bolstered by confident consumers, a strong job market, and a low rate of unemployment. These participants acknowledged that there were lingering risks and uncertainties about the global economy in general, and about international trade in particular, but they viewed those risks as having diminished over the intermeeting period. In addition, they viewed the news on inflation over the intermeeting period as consistent with their forecasts that inflation would move up to the Committee’s 2 percent objective at an acceptable pace without an adjustment in policy at this meeting.
Finally, a few participants expressed concerns that further monetary accommodation presented a risk to financial stability in certain sectors of the economy or that a reduction in the target range for the federal funds rate at this meeting could be misinterpreted as a negative signal about the state of the economy. Participants also discussed the timing of ending the reduction in the Committee’s aggregate securities holdings in the SOMA. Ending the reduction of securities holdings in August had the advantage of avoiding the appearance of inconsistency in continuing to allow the balance sheet to run off while simultaneously lowering the target range for the federal funds rate. But ending balance sheet reduction earlier than under its previous plan posed some risk of fostering the erroneous impression that the Committee viewed the balance sheet as an active tool of policy. Because the proposed change would end the reduction of its aggregate securities holdings only two months earlier than previously indicated, policymakers concluded that there were only small differences between the two options in their implications for the balance sheet and thus also in their economic effects.
In their discussion of the outlook for monetary policy beyond this meeting, participants generally favored an approach in which policy would be guided by incoming information and its implications for the economic outlook and that avoided any appearance of following a pre-set course. Most participants viewed a proposed quarter-point policy easing at this meeting as part of a recalibration of the stance of policy, or mid-cycle adjustment, in response to the evolution of the economic outlook over recent months. A number of participants suggested that the nature of many of the risks they judged to be weighing on the economy, and the absence of clarity regarding when those risks might be resolved, highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook.