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11 19 2015 | by Victor Xing | Central Banks

October FOMC Minutes – Policy Summary

October FOMC Minutes - dovish rate path deliberations amid expectedly hawkish liftoff language

Foreword: FOMC Minutes is an important communication tool to further clarify a previously released meeting Statement.  Given the FOMC Minutes are reviewed and revised several times during the 3 weeks following the FOMC meeting, FED officials can (and do) use the revision process to elaborate on their views.  Therefore, additional details in the Minutes may sometimes reinforce or argue against post-FOMC market consensus.

As a general rule, the most important section to focus on is the “Participants’ Views on Current Conditions and the Economic Outlook.”  Although it is also recommended to identify sections newly introduced in the latest Minutes, as they may contain deliberations specific to the most recent meeting.

Finally, the FOMC Minutes does not reveal the exact number of officials, nor their identity when they voice support or disagree on specific policy views.  The qualitative measures are: “most,” “many,” “a number of,” “a few,” “one.”

Full transcript of each FOMC meetings will be released to the public following a 5 year embargo.

Equilibrium Real Interest Rate (read dovish)

The October FOMC Minutes largely read hawkish as expected with one surprising caveat: meeting participants reviewed staff presentation regarding equilibrium real interest rate (or “r*”).  The Minutes noted the following observations by policymakers:

Actual level of short-term real interest rates has been below but not substantially below the equilibrium real rate, consistent with estimates that r* currently is close to zero, notably below its historical average.

Meeting participants noted that a smaller gap between the actual level of funds rate and near-zero effective lower bound might increase the frequency of episodes in which policymakers would not be able to reduce the federal funds rate enough to promote a strong economic recovery and rapid return to maximum employment or to maintain price stability in the aftermath of negative shocks to aggregate demand
A number of participants indicated that they expected short-run r* to rise as the economic expansion continued, but probably only gradually.

Current Conditions and the Economic Outlook

Policy normalization:

  • Some participants thought that the conditions for beginning the policy normalization process had already been met. Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting. Nonetheless, they emphasized that the actual decision would depend on the implications for the medium-term economic outlook of the data received over the upcoming intermeeting period. Some others, however, judged it unlikely that the information available by the December meeting would warrant raising the target range for the federal funds rate at that meeting.
  • Several participants indicated that, in the current low interest rate environment, it would be prudent for the Committee to consider options for providing additional monetary policy accommodation if the outlook for economic activity were to weaken to a degree that seemed likely to undermine continued progress in labor market conditions and impede the movement of inflation back to the Committee’s 2 percent objective over the medium term. It was also noted that the Committee would need to reformulate its communications regarding the near-term outlook for monetary policy if the economic outlook weakened significantly.
  • Participants generally agreed that it would probably be appropriate to remove policy accommodation gradually. Participants also indicated that the expected path of policy, rather than the timing of the initial increase, would be the more important influence on financial conditions and thus on the outlook for the economy and inflation, and they noted the importance of underscoring this view at the time of liftoff. It was noted that beginning the normalization process relatively soon would make it more likely that the policy trajectory after liftoff could be shallow. It was also emphasized that, while participants’ most recent economic projections suggested that a gradual increase in the target range for the federal funds rate will likely be appropriate to support progress toward the Committee’s dual objectives, monetary policy adjustments ultimately would be dependent on economic and financial developments.

Foreign growth risk:

  • Most participants saw the downside risks arising from economic and financial developments abroad as having diminished and judged the risks to the outlook for domestic economic activity and the labor market to be nearly balanced
  • A few participants, though, noted that downside risks from abroad were still significant


  • A few participants noted that the September CPI data appeared consistent with some firming in inflation. Surveys continued to suggest that longer-run inflation expectations remained stable. Participants still expected that the downward pressure on inflation from the previous declines in energy prices and the effects of past dollar appreciation would prove temporary. Several participants, however, cited downside risks to inflation, pointing, for example, to declines in market-based measures of inflation compensation. Nonetheless, participants generally continued to anticipate that, with appropriate monetary policy, inflation would move toward the Committee’s objective over the medium term, reflecting the anticipated tightening of product and labor markets, the waning of downward pressures from energy and import prices, and stable inflation expectations

Employment conditions:

  • Participants noted that the pace of job gains slowed while the unemployment rate held steady; nonetheless, a range of labor market indicators, on balance, suggested that underutilization of labor resources had diminished since early this year
  • Some participants were concerned that the recent slowdown in employment growth might prove more than temporary, and that improvement in labor market conditions might not continue
  • A number of participants expressed the view that further progress would be necessary before labor market conditions were fully consistent with maximum employment, while some others judged that there was little or no remaining underutilization of labor resources. Several participantsobserved that the recent employment reports had increased the uncertainty about the outlook for the labor market
  • Other participants viewed a broad range of recent labor market data as indicating a further reduction in slack and stressed the importance of assessing the cumulative improvement in the labor market since early in the year, which had been significant. Moreover, several participantsindicated that they viewed the pace of monthly job gains in September as still above the rate consistent with stable or declining labor market slack, and a few participants interpreted slower increases in payrolls as evidence that labor markets had tightened.

Wage and labor compensation:

  • The incoming information on wages and labor compensation, including recent data on average hourly earnings of employees, suggested that the pace of wage gains remained subdued. A number of participants cited staff analysis indicating that the modest pace of labor compensation growth in recent years may have reflected slower trend productivity growth that offset the upward pressure on wages from the narrowing of labor market slack. However, other participants noted that the continued subdued trend in wages was evidence of an absence of upward pressure on inflation from the current level of resource utilization. A number of participants reported that some of their business contacts were experiencing increasing challenges in hiring, resulting in upward pressure on wages in various occupations and in some geographic areas.

Manufacturing and export:

  • Participants viewed that manufacturing activity had slowed somewhat over the intermeeting period in a number of regions, importantly reflecting the weakness in exports, although the auto industry remained a bright spot.  In contrast, service-sector reports were mostly positive
  • Participants expected net exports to continue to subtract from GDP growth in the second half of the year, reflecting weak foreign activity as well as the earlier appreciation of the dollar

Consumer spending:

  • Notwithstanding the disappointing retail sales data in September,participants were encouraged by the solid pace of consumption growth in the third quarter and generally expected consumer spending to rise moderately going forward

Business investment:

  • Participants noted that business fixed investment appeared to be increasing at a solid rate despite the sharp contraction in energy-related investment

Broader economy:

  • Participants generally viewed the housing sector as continuing to recover, although a couple of participants noted that the pace of recovery was slow
  • A large decline in inventory investment was expected to reduce the pace of GDP growth in the third quarter, but participants saw further outsized declines in inventory accumulation as unlikely



The key part of the latest FOMC Minutes is as follows:

October FOMC Minutes - key part

“Most” participants is a good indicator on the direction of the FOMC, further suggesting policy normalization at the December FOMC meeting.  The strong October Payrolls should offset some concerns on labor market conditions, and meeting participants largely expressed optimism on inflation.

Deliberations on the Equilibrium Real Interest Rate and repeated mentions of “gradual” rate hike is consistent with the FOMC’s prior communications.

Thus, the October FOMC Minutes can be interpreted as preparing market expectation for a December rates liftoff, which will be followed by an initially gradual rate path, subject to changing economic conditions.


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Next article11 19 2015 | by Victor Xing | Capital Markets

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