WASHINGTON (MaceNews) – The minutes of the most recent Federal Open Market Committee meeting published Wednesday showed participants assumed it would be time for another rate hike “soon,” reinforcing the expectation in place for months that it would come at the FOMC session next month.
In addition, “many” participants opined that it may “fairly soon” not be accurate to call monetary policy “accommodative” as has been done in meeting statements since the first policy moves to deal with the aftermath of the Great Recession.
Nothing in the minutes was a surprise or offered greater insights into monetary policy deliberations that were not already assumed by the markets.
The Federal Reserve’s characterization of the FOMC discussion of monetary policy among participants follows:
In their consideration of monetary policy, participants discussed the implications of recent economic and financial developments for the economic outlook and the associated risks to that outlook. Participants remarked on recent above-trend growth in real GDP and on indicators of resource utilization. Some commented that consumer spending had been quite strong in the second quarter, confirming their impressions that the first-quarter weakness had been temporary. Several participants also pointed to the continued strength in business fixed investment, although the persistent weakness and the risk of a further slowdown in residential investment were also noted. A few participants suggested there could still be some labor market slack, citing recent increases in labor force participation rates relative to prevailing demographically driven downward trends; the participation rate of prime-age men, in particular, was still below its previous business cycle peak. Other participants judged that labor market conditions were tight, pointing to other data, including job quits and openings rates, and anecdotes from contacts.
Participants generally characterized inflation as running close to the Committee’s objective of 2 percent, and most of those who expressed a view indicated that recent readings on inflation had come in close to their expectations. Consistent with their SEP submissions in June, several participants remarked that inflation, measured on a 12-month basis, was likely to move modestly above the Committee’s objective for a time. Others pointed to some indicators suggesting that long-term inflation expectations could be below levels consistent with the Committee’s 2 percent inflation objective.
Participants generally judged that the current stance of monetary policy remained accommodative, supporting strong labor market conditions and inflation of around 2 percent. Participants agreed that it would be appropriate for the Committee to leave the target range for the federal funds rate unchanged at this meeting.
With regard to the medium term, various participants indicated that information gathered since the Committee met in June had not significantly altered their outlook for the U.S. economy. Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation. Participants generally expected that further gradual increases in the target range for the federal funds rate would be consistent with a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Many participants reiterated that the actual path for the federal funds rate would ultimately depend on the incoming data and on how those data affect the economic outlook.
Participants discussed the economic forces and risks they saw as providing the rationale for gradual increases in the federal funds rate as well as scenarios that might cause them to depart from this expected path. Among other factors, they pointed to uncertainty about the appropriate level of the federal funds rate over the longer run and to constraints on the provision of monetary accommodation during ELB episodes as reasons for proceeding gradually in the removal of accommodation. Some participants noted that stronger underlying momentum in the economy was an upside risk; most expressed the view that an escalation in international trade disputes was a potentially consequential downside risk for real activity. Some participants suggested that, in the event of a major escalation in trade disputes, the complex nature of trade issues, including the entire range of their effects on output and inflation, presented a challenge in determining the appropriate monetary policy response.
Participants also discussed the possible implications of a flattening in the term structure of market interest rates. Several participants cited statistical evidence for the United States that inversions of the yield curve have often preceded recessions. They suggested that policymakers should pay close attention to the slope of the yield curve in assessing the economic and policy outlook. Other participants emphasized that inferring economic causality from statistical correlations was not appropriate. A number of global factors were seen as contributing to downward pressure on term premiums, including central bank asset purchase programs and the strong worldwide demand for safe assets. In such an environment, an inversion of the yield curve might not have the significance that the historical record would suggest; the signal to be taken from the yield curve needed to be considered in the context of other economic and financial indicators.
A couple of participants commented on issues related to the operating framework for the implementation of monetary policy, including, among other things, the implications of changes in financial market regulations for the demand for reserves and for the size and composition of the Federal Reserve’s balance sheet. These participants judged that it would be important for the Committee to resume its discussion of operating frameworks before too long. The Chairman suggested that the Committee would likely resume a discussion of operating frameworks in the fall.
Many participants noted that it would likely be appropriate in the not-too-distant future to revise the Committee’s characterization of the stance of monetary policy in its postmeeting statement. They agreed that the statement’s language that “the stance of monetary policy remains accommodative” would, at some point fairly soon, no longer be appropriate. Participants noted that the federal funds rate was moving closer to the range of estimates of its neutral level. A number of participants emphasized the considerable uncertainty in estimates of the neutral rate of interest, stemming from sources such as fiscal policy and large-scale asset purchase programs. Against this background, continuing to provide an explicit assessment of the federal funds rate relative to its neutral level could convey a false sense of precision.