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05 18 2016 | by Victor Xing | Central Banks

April FOMC minutes: signaling for June

April FOMC minutes

The April FOMC minutes was more hawkish than expected.  Market participants were aware of policymakers’ diminishing concerns over foreign growth risks, but few anticipated the willingness by “most” FOMC participants to raise rates in June, conditional to steady data.

More over, the April meeting saw heightened concerns over financial stability risk (as previously highlighted by Boston Fed President Rosengren on the “rapidly rising prices of CRE“), as well as renewed debates on the role of monetary policy versus macroprudential policy on stability concerns.

It is worth mentioning that financial stability considerations was the catalyst that led to the 2013 “Taper Tantrum.”  In his memoir, former Fed Chair Ben Bernanke cited concerns by Governor Jerome H. Powell and then Governor Jeremy C. Stein on financial markets’ “excessive risk taking” as a result of QE3.  This ultimately led to Bernanke’s “next few meetings” comment which rattled financial markets across the globe:

Jay and Jeremy, having arrived at the Board at the same time, spent a lot of time together, and I often met with them jointly.  They both wanted to be supportive, but neither was entirely comfortable with our easy monetary policy and our growing balance sheet.  Jeremy talked about his concerns in a series of speeches that received substantial media attention.  He was particularly worried that our securities purchases could stoke excessive risk taking in financial markets.  It was not a new argument, but Jeremy made it in more detail and in a particularly sophisticated way.  He acknowledged the merit of my long-held view that the first and best line of defense against financial instability should be targeted regulatory and supervisory policies, not monetary policy.  But he did not want to rely only on regulation and supervision.  Financial risks could be hard to detect, he argued, and only higher interest rates could “get into all the cracks,” as he put it, and reduce the incentives for excessive risk taking wherever it might occur.  I agreed that higher interest rates could get into all the cracks, in the sense of their affecting a wide range of financial and economic decisions; it was for that very reason that using this tool to cure a perceived problem in financial markets risked creating ills for the broader economy.

Ben Bernanke went on to explain his concession to his colleagues at the Board, who all had permanent votes on the FOMC:

I met with all the Board members.  Unusually, I also gave Jay, Jeremy, and Betsy the opportunity to comment on the opening remarks I planned for the March news conference.  I told them that while my view on securities purchases differed from theirs, I would do my best to accommodate their preferences.  “My position as Chairman is untenable if I don’t have the support of the Board,” I told them.  I said I expected that we would be able to slow our purchases by September, and possibly by June.

Granted, concerns over CRE and asset price appreciation appear to be coming from District 1 (although minutes mentioned “a few” participants sharing this view), not within Board of Governors, but macroprudential measures’ limited efficacy over non-banks (a focus of Vice Chair Fischer) can create a scenario of greater reliance on monetary policy over regulatory responses to combat instability risks.

Breaking down the April FOMC minutes

Rate path

  • Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the FOMC’s 2% objective, then it likely would be appropriate to increase funds rate in June
  • Some participants expressed confidence that incoming data would prove broadly consistent with economic conditions that would make a rate hike in June appropriate
  • Some participants were concerned that market participants may not have properly assessed the likelyhood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments
  • Several participants were concerned that the incoming information might not provide suficiently clear signals to determine by mid-June whether an increase in rates would be warranted
  • A few participants judged it appropriate to increase the target range for the funds rate at the April meeting
  • A couple participants were concerned that further postponement of action to raise the federal funds rate might confuse the public about the economic considerations that influence the Committee’s policy decisions and potentially erode its credibility
  • Two participants noted “large and persistent deviations” of the funds rate from several standard policy benchmarks and interest rate rules, and they saw risks of having to raise rates quickly to combat inflation pressures, as well as risks of imprudent risk-taking in financial markets


  • Many participants saw recent developments provided greater confidence that inflation would rise to 2% over the medium term
  • Some viewed recent firming in core inflation as broadly based and unlikely to unwind
  • Some participants continued to see progress toward the Committee’s 2% inflation objective as likely to be gradual
    • They noted that March CPI data showed that the high monthly readings on some components of core prices in January and February were transitory
  • Several commented that the stronger labor market still appeared to be exerting little upward pressure on wage or price inflation
  • Several participants noted recent increases in alternative measure of the trend in inflation, such as the trimmed mean PCE and the median CPI
  • Several participants continued to see important downside risks to inflation
    • Market-based measures of inflation compensation are still low
    • “Slippage” in some survey measures of expected longer-run inflation

Labor market conditions

  • Many participants judged that labor market conditions had reached or were quite close to those consistent with their interpretation of the Committee’s objective of maximum employment
  • Many participants continued to see scope for reducing labor demand continued to expand
  • A number of participants indicated that the recent rise in the participation rate was a positive development
  • Several participants reported a pickup in wages, shortages of workers in selected occupations, or pressures to retain or train workers for hard-to-fill jobs

Consumer spending

  • Participants noted that the slowdown in consumer spending early this year was primarily due to weaker expenditures for goods while outlays for services continued to increase in line with recent trends
  • Most participants see solid job gains and real income growth, along with a high level of household wealth and relatively upbeat consumer sentiment to support a pickup in consumer spending after its slowdown in the first quarter
  • Some participants were concerned that transitory factors may not fully explain the softness in consumer spending or the broad-based declines in business investment in recent months
  • A couple of participants noted that consumers’ caution in recent months might have been the result of financial market turmoil in the first two months of this year

Domestic and foreign risk factors

  • Participants generally saw the risks stemming from global economic and financial developments as having diminished over the inter-meeting period but as continuing to warrant close monitoring
  • Many participants noted that downside risks emanating from developments abroad, while reduced, still warranted close monitoring
  • A number of participants judged that the risks to the outlook for inflation remained tilted to the downside in light of low readings on measures of inflation compensation and the fall over the past year in some survey measures of longer-term inflation expectations
  • Some participants pointed to the risk that the recent weak data on domestic spending could reflect a loss of momentum in the economy that might hinder further gains in the labor market and raise the likelihood that inflation could fail to increase as expected

Financial stability risk

  • Some participants noted potential risks to financial stability in maintaining a patient policy posture
  • Several noted the ongoing need to remain alert to vulnerabilities in the financial system
  • A few cited concerns about rapidly rising prices of CRE, including multifamily properties, or about iliquidity of the assets of some mutual funds

Financial conditions

  • Participants cited several factors that likely contributed to the easing in financial conditions
    • Federal Reserve communications after the March FOMC meeting led financial market participants to shift down their expectations concerning the likely path of the Committee’s target for the federal funds rate
    • Recent depreciation of the dollar and indications of a rebound of economic growth in China appeared to reduce pressures on the renminbi
    • Signs of a pickup in growth in economic activities in some AFEs and emerging Asian economies other than China
  • Participants generally agreed that the easing in financial conditions in the U.S. would provide some support for consumer spending and business investment going forward and had reduced the downside risks to the outlook


  • Participants’ projections in the SEP assumed productivity growth would strengthen
  • Many participants commented on a range of possible outcomes that could result from slower-than-expected productivity growth
    • Some saw unemployment rate might decline more quickly and inflation might rise a bit more rapidly than expected if productivity growth continued to disappoint in coming quarters while hiring remained strong, leading to a steeper rate path
    • Alternatively, low productivity might instead lead to slower-than-anticipated growth in household income and sales, leading in paths for the unemployment rate and the funds rate little different than currently expected
  • Several participants noted that lower trend productivity growth would depress longer-run equilibrium federal funds rate

Business activities

  • A number of participants cited weakness in capital spending in recent quarters was in part due to the ongoing contraction in drilling activity and weak demand for U.S. exports
  • Some participants were positive about the outlook for business spending, pointing to the optimism reported in a number of business surveys or to rising business investments in both equipment and commercial structures in their Districts
  • Several participants commented that their business contacts had expressed considerable caution about the economic outlook or had indicated that their firms were focused on cost-cutting measures that included delaying major expenditures

Special topic (staff presentation): The Relationship between Monetary Policy and Financial Stability

  • Participants noted that more stringent regulatory and supervisory policies implemented since the crisis had significant increased the resilience of the financial system to shocks
    • Macroprudential tools should be the primary means to address financial stability risks
    • There are relatively few macroprudential tools available to financial regulators in the U.S., and these tools are largely untested
    • A number of institutional factors may make it difficult to deploy macroprudential tools expeditiously in the U.S. and may lessen their effectiveness
  • Participants generally agreed that the Committee should not completely rule out the possibility of using monetary policy to address financial stability risks, particularly in circumstances in which such risks significantly threatened the achievement of its dual mandate and when macroprudential tools had been or were likely to be ineffective at mitigating those risks
  • Most participants judged that the benefits of using monetary policy to address threats to financial stability would typically be outweighed by the cost of doing so
  • Some participants noted the benefit of using monetary policy to address instability risks are highly uncertain

Market reactions

Financial conditions tightened notably following the release of April FOMC minutes.  5s led the sell-off to weaken 6 bps on the follow (9 bps on the day).  Long-end of the curve weakened 2 bps post minutes, but it had weakened 3 to 4 bps earlier in the day.  Interestingly, the sell-off in risk assets was less than expected under a more aggressive tightening scenario, as U.S. equity indices ended the session largely unchanged.

April FOMC minutes
Long-end of the Treasury curve led the weakness before the minutes, and the curve re-flattened on-the-follow (prices of 5 year Treasury futures in blue, 30 year futures in gold)

Funding cost (of the reserve currency) staged a strong rally:

April FOMC minutes
Dollar soared following the April FOMC minutes

Rate hike probability rose across the board, and federal funds futures market has subsequently priced in 1 and a quarter hike for the remainder of the year (another step closer to Dudley’s assessment)

April FOMC minutes
Fed funds futures has priced in 1.25 hikes for the rest of 2016

Next article05 17 2016 | by Victor Xing | Economics

Above consensus April CPI led by energy and OER