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07 06 2016 | by Victor Xing | Central Banks

June FOMC minutes: uncertainties at home and abroad


The June FOMC minutes reaffirmed market expectations of Fed policy caution amid domestic (labor market conditions) and foreign (soft growth abroad and “Brexit”) uncertainties.

June FOMC minutes

Labor market conditions

  • Participants generally expected to see a resumption of monthly payroll gains to promote further strengthening of labor market conditions
  • Almost all participants judged that the surprisingly weak May employment report increased uncertainties of policy outlook
  • Many participants remain reluctant to change their outlook materially based on one economic data release
  • Many participants argued that the reported rate of payroll growth likely understated its underlying pace due to transitory factors
  • Many participants thought that the underlying pace of job growth had slowed some from that of previous month
  • Some participants noted that some indicators did not corroborate a material weakening of job growth
  • Some participants noted that lower rate of payroll gains could be indicative of a broader slowdown in economic growth
  • A few participants commented that movements in labor force participation rate in recent months are consistent with a secular downtrend (please see chart 1)
  • A few participants suggested that weak employment growth may indicate labor supply constraints associated with improvements in labor market conditions


  • Most participants expected to see continued progress toward the Committee’s 2% inflation objective
    • Some measures of core inflation have firmed
    • Evidence of a pick-up in wage growth
    • Ongoing tightening of resource utilization
    • Firming in oil prices
  • Other participants were less confident that inflation would return to its target level over the medium term
    • Tighter resource utilization may impart only modest upward pressure on prices
    • Persistent disinflationary pressure from abroad
    • Softening in some survey-based measures of longer-term inflation expectations and market-based measures of inflation compensation (please see chart 2)

Foreign risk factors

  • Participants generally agreed that global economic and financial developments should continue to be monitored closely
  • Most participants noted that the upcoming British referendum on membership in the EU could generate financial market turbulence that could adversely affect domestic economic performance
  • Some participants indicated that prospects for economic activity in many foreign economies appeared to be subdued
  • Some participants also noted that continued uncertainty regarding China’s FX policy and high debt levels represented appreciable risks

Rate path

  • Most participants still expected that the appropriate target range for the funds rate would rise gradually in coming years
  • Many participants commented that levels of the neutral rate appeared to be lower currently or was likely to be lower in the longer run than they had estimated earlier
  • Many participants judged that longer-run neutral rate would likely remain low relative to historical standards
  • Some participants noted that their forecasts were now consistent with a shallower path than they had expected at the March meeting
  • Several participants commented that the Committee could better gauge the effects of increases in the federal funds rate on the economy if it proceeded gradually in adjusting policy

Policy normalization

  • Most participants judged that raising the target range for the funds rate would be appropriate under the following conditions:
    • A pick-up in economic growth
    • Job gains were continuing at a pace sufficient to sustain progress toward objective
    • Inflation was likely to rise to 2% over the medium term
  • Some participants viewed a broad range of labor market indicators as well as recent firming in wages as consistent with a high level of labor utilization
    • Several of these participants expressed concern that a delay in policy normalization would increase the risks to financial stability or raise the potential for overshooting the Committee’s objectives
  • Some other participants were uncertain whether economic conditions would soon warrant an increase in the target range for the funds rate
    • Several of these participants noted downside risks to economic growth and labor market conditions
    • Several of these participants worried about the declines in measures of inflation compensation and in some survey-based measures of inflation expectations and suggested that monetary policy may need to remain accommodative for some time (please see chart 2)
  • Several participants argued that monetary policy could respond more effectively to surprisingly strong inflationary pressures in the future than to a weakening in the labor market and falling inflation
  • A few participants pointed out that inflation likely to remain low for some time, and accommodative policy could extend the strengthening of the labor market

Business fixed investment

  • Participants identified potential causes of the broader weakness in investment spending
    • Slowdown in corporate profits
    • Concern about prospects for economic growth
    • Heightened uncertainty regarding the future course of domestic regulatory and fiscal policies
    • Persistent reluctance on the part of firms to undertake new projects in the wake of financial crisis
  • Participants also cited factors that could lead to a pickup in business spending
    • Recent turnaround in energy prices
    • Greater business optimism
  • Some participants mentioned that the sluggishness in business investment could portend a broader economic slowdown
  • A couple participants noted that elevated inventory levels could be a drag on economic growth in the near term

Consumer spending

  • Most participants anticipated a rebound in consumer spending in light of the still-solid fundamental determinants of household spending
  • Some participants indicated that consumption was likely to continue being supported by ongoing gains in income, robust household balance sheets, and positive consumer sentiments
  • A few participants expressed caution about the outlook for consumer expenditures
    • Slower increases in employment
    • Higher energy prices


  • A number of participants indicated that single-family construction was strengthening and house prices were rising in most parts of their districts

Next article06 29 2016 | by Victor Xing | Economics

May PCE: services strength amid softer goods inflation