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11 15 2016 | by Victor Xing | Central Banks

November FOMC minutes and debates behind guidance change

November FOMC minutes

The November FOMC minutes highlighted the change in forward guidance to include the word “some” to communicate that the FOMC did not need to see much more progress toward its dual mandate to resume policy normalization, although “some” participants (likely Governor Brainard, Tarullo and Powell) continued to argue against an “immediate need to tighten policy.”

Policy normalization

  • Participants generally agreed that the case for higher funds rate had continued to strengthen
  • Participants expected economic conditions to evolve in a manner that would warrant a gradual rate path
  • Participants saw recent information as indicating that labor market conditions had improved further and considered the firming in inflation and inflation compensation to be positive developments
  • Most participants expressed a view that it could well become appropriate to raise rates relatively soon, so long as incoming data provided some further evidence of continued progress toward the Committee’s objectives
  • A number of participants expressed the view that some modest slack remained in the labor market or noted that readings on inflation compensation and inflation expectations remained low
  • Many participants judged that risks to economic and financial stability could increase overtime if labor market overheated appreciably
  • Some participants suggested that current conditions did not point to an immediate need to tighten policy
  • Some participants argued that to preserve credibility following recent communications, the FOMC should raise rates at the next meeting
  • Some participants judged that allowing the U3 to fall below its longer-run normal level for a time could result in favorable supply-side effects or help hasten progress toward the Committee’s price stability mandate
  • A few participants advocated an increase in rates at the November meeting

Financial conditions

  • Participants recognized the substantial shift of assets out of prime funds and into government-only funds following MMF reforms, and they judged these reforms had contributed to a sizable reduction of risk in the shadow banking system
  • Participants discussed some causes of the low yields on longer-term Treasury securities and their embedded term premiums, which were below historical average levels
    • Persistent decline in the neutral federal funds rate
    • Elevated size of the Federal Reserve’s balance sheet
    • Reduced likelihood of high inflation relative to several decades ago

Inflation and inflation expectations

  • Participants generally regarded the somewhat higher than expected headline and core PCE price inflation as a positive development
  • Participants judged that survey-based measures of inflation expectations had been fairly stable in recent months
  • Some participants regarded the uptick in market-based measures of inflation compensation as a welcome suggestion of further progress toward the Committee’s inflation goal
  • Several participants cautioned that market-based measures of inflation expectations remained low or still appeared to embed a significant weight on undesirably low inflation outcomes
  • A few participants observed that it was difficult to judge how much of the uptick in core PCE reflected transitory factors
  • A couple participantssaw the incoming data as suggesting that inflation could move up to objective more rapidly than expected

Labor market conditions

  • Participants expressed uncertainty about how long the participation rate could be expected to continue rising
  • Some participants expressed the view that the economy was close to or at full employment
  • Some participants characterized wage pressure as only moderate
  • Several participants judged that appreciably slack could remain in the labor market
  • A few participants noted that the increase in participation had largely reflected a diminution in the flow of individuals leaving the workforce rather than an increase of new entrants into the labor force and had been more prevalent among workers with relatively less education
  • One participant noted that wage growth was similar to its pace at the peak of the previous economic expansion

Domestic and foreign risk factors

  • Participants noted that economic growth in many foreign economies remained subdued, and that inflation rates abroad generally were still quite low
  • A substantial majority viewed the near-term risks to the economic outlook as roughly balanced
  • Some participants observed that important international downside risk remained
    • Constraints on monetary policy in the low interest rate environment
    • Investors’ concerns about developments potentially affecting profitability in the European banking sector
    • Possible consequences of upcoming negotiations and eventual terms of Brexit
    • Potential deleterious effects from rapid credit growth in China
    • Potential for further dollar appreciation and its constraints on U.S. inflation
  • A few participants judged that significant downside risks remained

Business conditions

  • Participants continued to expect economic activity in the coming quarters to be supported by a pickup in business investment
  • A few participants reported that uncertainty about prospects for government policy, shorter investment time horizons for businesses, or the potential for advances in technology to disrupt existing business models to weigh on capital spending plans
  • A few participants noted weakness in nonresidential construction
  • One participant reported generally strong conditions in the District’s housing markets but also cited factors that were restraining residential construction in some locales

Long-run monetary policy implementation framework

  • The Chair reiterated that additional experience with the Federal Reserve’s current monetary policy implementation framework would help inform policymakers’ future deliberation of issues related to a long-run framework and that decision regarding these issues would not be required for some time
  • Policymakers agreed that decisions regarding the long run implementation framework were not necessary at this time
  • Participants agreed that issues associated with monetary policy implementation should be discussed within the context of the current and potential future economic and financial environment and the Committee’s strategy for monetary policy
  • The staff noted the following
    • If the long-run implementation framework was such that the supply of reserve balances was quite abundant, then operation tools that helps establish a floor under short-term interest rates, such as IOER and ON RRP facility would remain important elements of the operating regime
    • If in the long run the supply of reserves was quite small, such as was before the financial crisis, then either reserve requirements or voluntary reserve targets would probably be needed to help stabilize the demand for reserves and increase its predictability

Next article11 04 2016 | by Victor Xing | Economics

October Payrolls: decent data with stronger wage growth