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02 17 2016 | by Victor Xing | Central Banks

January FOMC minutes: uncertainty and downside risk

Summary of the January FOMC minutes

Link: January FOMC minutes

Global financial market volatility and the U.S. economy

  • Given their increased uncertainty about how global economic and financial developments might evolve, FOMC participants emphasized the importance of closely monitoring these developments and of assessing their implications for the labor market and inflation, and for the balance of risks to the outlook
  • Most participants thought that the extent to which tighter conditions would persist and what that might imply for the outlook were unclear
  • Most participants judged that it was premature to alter appreciably their assessment of the medium-term economic outlook
  • Most Participants continued to anticipate that economic activity would expand at a moderate pace over the medium term and that the labor market would continue to strengthen

Financial Conditions

  • Almost all participants cited a number of recent events as indicative of tighter financial conditions
    • Declines in equity prices
    • Widening in credit spreads
    • Further dollar appreciation
    • Increase in financial market volatility
  • A number of participants noted that large magnitude of changes in domestic financial market conditions was difficult to reconcile with incoming information on U.S. economic developments
  • Some participants pointed to significant tighter financing conditions for speculative-grade firms and small businesses, as well as tighter standards for C&I and CRE loans.  If they were to persist, may be roughly equivalent to those from further firming of monetary policy
  • A couple of participants pointed out that recent decline in equity prices could be viewed as converging with historical norms
  • A few participants cautioned that valuations in the CRE markets should be closely monitored

Rate path

  • Participants judged that the overall implication of macro developments for the outlook for domestic economic activity was unclear, but they agreed that uncertainty had increased
  • Many participants saw recent developments as increasing the downside risk to the outlook
  • Participants pointed out some market-based measures of long-term inflation compensation had declined to historically low levels, which increased concerns about whether inflation expectations could be moving lower
  • Other participants noted that survey-based measures of longer-term inflation expectations had remained fairly steady
  • Several participants noted that monetary policy was less well positioned to respond effectively to shocks that reduce inflation or real activity than to upside shocks, and waiting for additional information before taking the next step to reduce policy accommodation would be prudent
  • A few participants characterized measures of underlying inflation rates as having stayed relatively stable
  • A few participants noted that direction evidence that inflation was rising toward 2% would be an important element of their assessment of the outlook and of appropriate path for policy

Foreign economic outlook

  • Participants noted that the slowdown in China’s industrial sector and the decline in global commodity prices could restrain economic activity in the EME and other commodity producing countries for some time
  • Participants discussed possibility that structural changes and financial imbalances in the Chinese economy might lead to a sharper deceleration in economic growth in that country than was generally anticipated, amid uncertainty about China’s exchange rate regime
  • A number of participants were concerned about potential drag from greater-than-expected slowdown in China and other EMEs on the U.S. economy


  • Participants agreed that further decline in the prices of oil and other commodities and the additional appreciation of the dollar since the December FOMC would keep inflation low in the near term
  • Most participants continued to anticipate that once the price of energy and the exchange value of the dollar stabilized, the dis-inflationary effects would fade
  • A number of participants indicated that they view the outlook for inflation as somewhat more uncertain or saw the risk as being to the downside
  • Several participants viewed their inflation outlook as depending importantly on continued strengthening of the labor market or on an above-trend pace of economic activity
  • Several participants reiterated the importance of monitoring inflation developments closely to confirm that inflation was evolving along the path anticipated by the FOMC
  • Some participants emphasized the need for longer-run inflation expectations to remain well anchored
  • Some participants interpreted long-run inflation expectations as still relatively well anchored, according to readings from survey and market-based inflation expectations
  • Some other participants expressed concerned about the further decline in inflation compensation recently and the historically low levels of some survey measures
  • Some participants noted the difficult of distinguishing declines in expected inflation embedded in those market-based measures from changes in risk and liquidity premiums, as well as impacts from oil prices

Labor market conditions

  • Participants cited strong employment gains, low levels of unemployment in their Districts, reports of shortages of workers in various industries, or firming in wage increases
  • Most participants anticipate that employment would expand at a solid rate over the year ahead
  • Many viewed labor market under-utilization as having been substantially reduced
  • Some participants judged that labor market indicators tended to provide a more reliable early readings on the economy’s underlying strength, as they noted that preliminary spending data and initial estimates of GDP are often revised substantially
  • Several participants saw the prospect of some moderation in employment gains from the particularly large increase in the fourth quarter of 2015
  • A few participants saw labor market slack as having been largely eliminated


  • Downward pressure on domestic energy activity intensified over the inter-meeting period as oil prices dropped further
  • Supply demand imbalance remained very high and appeared unlikely to be resolved quickly, as was evidenced by a further downshift in oil future prices
  • Participants’ contacts in the energy sector reported the following:
    • Firms were still adjusting to lower prices and the contraction in their businesses
    • Some firms expected that they would need to cut investment and employment further
  • Energy firms continued to face tightening financial conditions and financial stress was building for those with high levels of debt

Consumer spending

  • Many participants indicated that they still expected consumer spending to contribute importantly to economic growth in the coming year
  • A number of participants noted that the recent moderation in spending seemed inconsistent with continued strong gains in households’ real income from rising employment and falling energy prices amid relatively elevated level of consumer sentiment
  • Several participants were concerned that the rise in the saving rate since the middle of 2015 might suggest an elevated degree of caution about the economic outlook or that the recent retreat in equity values, if sustained, might damp spending
  • A couple of participants pointed out that survey data suggest households had not appeared to be particularly sensitive to changes in financial market conditions

Business sentiment

  • Participants saw weakness in the manufacturing sector extended into January
  • Some participants reported a deterioration in business sentiment in the wake of recent global economic and financial developments
  • Several participants pointed to aerospace, autos and consumer products as areas of strength in the manufacturing sector
  • A few participants commented that manufacturers surveyed were still relatively optimistic about the outlook for 2016


  • Housing sales and construction continued to trend up through the end of 2015, extending the gradual recovery in the housing sector
  • Some participants highlighted the sector with improved activity
  • A couple participants noted tighter mortgage lending regulations appeared to have slowed the origination process and temporarily reduced home sales


Appropriate aggregate capacity of the ON RRP facility (cap)

  • Participants reiterated that the FOMC expects to phase out the facility when it is no longer needed to help control the federal funds rate
  • Participants unanimously agreed that it would be appropriate to reintroduce an aggregate cap on ON RRP operations at some point
  • Nearly all participants indicated a preference for waiting a couple of months or longer before making operational adjustments to the facility

Strategy that would be used to cap the ON RRP facility

  • Most participants favored an approach with a relatively high cap level to be imposed initially – though one that nonetheless would significantly reduce capacity relative to the current situation – with the intention of periodically making further reductions in the level of the cap as appropriate
  • Other participants indicated a preference for initially imposing a somewhat lower cap
  • Some participants noted that the demand for ON RRPs could be reduced by widening the spread between the interest rate on reserves and the offering rate on ON RRPs

Drivers for future decisions on the size and ultimate longevity of the ON RRP facility

  • Participants indicated that the Committee’s future decisions on the size and longevity of the facility should be largely driven by considerations of monetary control
  • Participants see other factors such as financial stability should be taken into account
  • Most participants emphasized the primacy of maintaining monetary control in setting the appropriate capacity of the ON RRP facility for the time being

Appropriate management of the Federal Reserve’s RRP operations over quarter-ends

  • Participants agreed that for some time at least, the FOMC would continue to provide ample RRPs in some form over quarter-ends, including in March
  • Several participants indicated a preference for continuing to take account of calendar effects in conducting RRPs
  • Some participants do not view temporary declines in the federal funds rate as a materially adverse factor for monetary control


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