Economic Flash

FOMC Meeting Minutes – Another Hike Likely Soon (June), and an IOER Adjustment

by Craig Dismuke, Dudley Carter

FOMC Meeting Minutes – Another Hike Likely Soon (June), and an IOER Adjustment


The May 1-2 FOMC Meeting Minutes reflect a Committee that is confident in growth and inflation and lay the groundwork for a June rate hike.  While the outlook for inflation remains confident, the Minutes do reflect more uncertainty than was shown in the Official Statement.  As it relates to the flattening yield curve, Fed officials do not appear to be overly concerned.  Additionally, a “technical adjustment” lowering the IOER rate 5 bps was discussed.


More Confident on Inflation, but Some Concerns Remains:

Officials appeared much more confident in their assessment of inflation in the May Official Statement and the Minutes state that, “Most participants viewed the recent firming in inflation as providing some reassurance that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis.”  However, the Minutes also show that there was a little more uncertainty surrounding the inflation outlook than was reflected in the Official Statement.  According to the Minutes, “it was noted that it was premature to conclude that inflation would remain at levels around 2 percent.”  Many participants also emphasized the importance of returning inflation to its 2 percent goal on a “sustained basis.”  Additionally, “several participants suggested that the underlying trend in inflation had changed little … some of the recent increase in inflation may have represented transitory price changes … [and] that various measures of underlying inflation … remained relatively stable at levels below 2 percent.”


Wage Pressures Continue to Be Seen as Moderate:

A key indication of participants’ views on future inflation trends, many officials still reported only “moderate” wage pressures with strong pressure limited to “industries and occupations experiencing very tight labor supply.”  Several officials went so far as to say that “recent wage developments provided little evidence of general overheating in the labor market.”  One reason several officials provided for the lack of wage pressure was the return of workers to the labor market, thus providing additional slack.


Monetary Policy – June Rate Hike Teed Up:

On monetary policy, the Minutes stated that, “Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation” (emphasis added).  The “likely soon” verbiage has been a consistent indicator of an upcoming rate hike.


The FOMC’s forward guidance in its Official Statement currently says that the “federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run” and that “the stance of monetary policy remains accommodative”.  As the Fed continues its gradual hikes, either this language would need to be changed or the Fed’s longer-run neutral rate would need to be raised from its current 2.875%.  While the Minutes acknowledged this, they did not hint at how it would be resolved.


Flattening Yield Curve – This Time Is Different?:

Officials provided several causes for the flattening yield curve but did not appear to be collectively worried about the curve inverting.  Factors listed as causes included, “the expected gradual rise of the federal funds rate, the downward pressure on term premiums from the Federal Reserve’s still-large balance sheet as well as asset purchase programs by other central banks, and a reduction in investors’ estimates of the longer-run neutral real interest rate.”  The latter two causes, presumably, gave a few participants reason to dismiss the predictive ability of the flattening curve.  “A few participants noted that such factors could make the slope of the yield curve a less reliable signal of future economic activity.”  However, “several participants thought that it would be important to continue to monitor the slope of the yield curve.”


Many Participants Believe It Useful to Drop IOER Rate 5 BPS below Top End of Target Rate:

In response to recent market developments which have pushed the effective Fed Funds rate to within 5 bps of the high-end of the target range, Fed officials are considering lowering the IOER rate by 5 bps.  Under consideration is continuing to have a 25 bps target range but an IOER that is reduced from 25 bps to only 20 bps above the lower-end of the range.  The change could accompany a rate hike in which case the target range could be raised to 1.75-2.00% with an IOER of 1.95%.  Additionally, it could occur independent of a rate hike in which case the target range could remain at 1.50-1.75% but the IOER be reduced to 1.70%.  According to the Minutes, “Many participants judged that it would be useful to make such a technical adjustment sooner rather than later. Participants generally agreed that it would be desirable to make that adjustment at a time when the FOMC decided to increase the target range for the federal funds rate.”

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