Fed Minutes Reflect Growing Confidence
by Craig Dismuke, Dudley Carter
The Minutes from the January FOMC meeting reflect a Fed that is 1) more optimistic about near-term growth, 2) more convinced that inflation would rise to the Committee’s 2% target over the medium term, and (3) more confident in their current base-case call for three hikes in 2018.
On the growth front, “most [voting] members viewed the recent data bearing on real economic activity as suggesting a modestly stronger near-term outlook than they had anticipated at their meeting in December.” In addition to the better domestic data, many officials “noted that financial conditions had eased significantly” since their December meeting because of continued Dollar weakness and continued strength in equity markets. It is important to remember this meeting was prior to the extreme equity volatility in February. Tax legislation was mentioned several times and, despite some continued uncertainty, most voters expected the effects could be “a bit greater in the near term than they had previously thought.”
Inflation and Employment
Specifically looking at the mandate, the “labor market had strengthened further” and it was pointed out that broader measures of unemployment “had returned to their pre-recession levels.” As to the more perplexing portion of the mandate, “almost all participants believe inflation will reach the 2%-target over the medium term” and “several commented that recent developments had increased their confidence in the outlook for further [inflation] progress.” But while the consensus seems to be for firmer inflation, there remained some holdouts who are yet to be convinced. The “some” participants that see “appreciable risk that inflation would continue to fall short” continue to point to “little solid evidence” of “significant wage or inflation pressures” providing the Fed the opportunity for patience. On the wage front, “some participants heard more reports of wage pressures from their business contacts over the intermeeting period”, however “participants generally noted few signs of a broad-based pickup in wage growth in available data.”
The intriguing addition of the word “further” in two places within the January Statement was also reflected in the Minutes. According to the Minutes, the “majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate” (emphasis added). Analysts have speculated that “further” could either refer to 1) a continuation of 2017’s gradual hikes or 2) additional hikes beyond the gradual pace of tightening already projected. Based on the context of the Minutes, this addition appears to refer to the continuation of hikes along the projected path. However, the risks are building that the meaning of “further” could morph into additional hikes in the future if growth remains above-trend and that translates into faster-than-expected wage growth and inflation.
The Minutes depicted a Fed more comfortable in their call for three 2018 rate increases because of the combined effect of U.S. tax cuts, an improving global economy, and accommodative financial conditions. For now, a March hike appears to be in the bag with at least two more likely to follow by year-end.