January FOMC meeting minutes: change is coming, slowly

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The minutes of the January Federal Open Markets Committee (FOMC) meeting reveal policymakers at the Federal Reserve becoming increasingly confident in the outlook for inflation in the US.

Progress towards inflation target

Even before the recent upside surprises in wage and CPI data and news of further fiscal stimulus in the form of a two-year budget deal, “several [participants] commented that recent developments had increased their confidence…for further progress toward the 2% inflation objective.”

This increased confidence stemmed from a range of sources including

  • stronger forecasts for economic growth (at least partly due to a reassessment of the near-term effects of the tax cuts)
  • continued accommodative financial conditions
  • further strengthening in the labour market
  • a weaker US dollar.

At the time of the 30-31 January meeting, this confidence does not appear to have translated into upward revisions in inflation projections – the FOMC by and large still sees inflation moving up to 2% over the medium term. But clearly the downside risks to inflation, as perceived by the committee as a whole, were less than they were at the time of the rate-setting meeting in December.

Source: Federal Reserve

Developments since the FOMC meeting

There is a certain whiff of staleness to these minutes given recent data and fiscal policy developments and the decline in equity markets. So how do these recent developments impact the policy outlook?

At the very least, I expect an upward revision to the 2018 median growth projection at the March meeting, to more fully incorporate the effects of the tax cuts on household and business spending. It is also possible that some FOMC members will begin to incorporate the two-year spending deal in their March projections, especially if the necessary appropriations bills are signed into law by that time.

Changes to the policy projections?

What is less clear is whether the median inflation and policy rate projections will be revised at the March meeting. Recent comments from FOMC participants, including comments made after the two-year budget deal was struck, suggest no significant changes in inflation forecasts and a general sense that the committee can still afford to be gradual in removing monetary accommodation.

The title of an early February speech by San Francisco Fed President John Williams – “Expecting the Expected: Stay Calm When the Data Meet the Forecasts” – captures what can be described as the committee’s “wait-and-see” approach to inflation and policy forecast revisions. Unless there are upside surprises to the February CPI and PPI data, I expect the median 2018 policy rate projection to remain at its current level at the March meeting.

On track for four 25bp rate increases in 2018

The minutes contain a brief discussion of the evolution of financial conditions over the intermeeting period. Participants “viewed the economic effects of the decline in the US dollar and the rise in equity prices as more than offsetting the effects of the increase in nominal Treasury yields”. Of course, since the meeting financial conditions have tightened as equity prices have fallen, the trade-weighted dollar has appreciated and nominal Treasury yields have continued to rise.

However, the overall impact has been relatively minor thus far, and the committee will not be particularly concerned by this tightening in conditions given just how accommodative conditions have remained since it began raising the target for the federal funds rate in December 2015. In addition, the economic impact of the recently announced spending measures will more than offset the impact of recent financial market developments.

Overall, the recent combined news on fiscal stimulus and financial conditions only increases my confidence in my projection for four 25 basis point rate increases this year, even if the committee is somewhat slow to signal this in its projections.

Steven Friedman

Senior Economist

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