24/7 Wall St.

Wednesday’s economic reporting included the Minutes of the Federal Open Market Committee from the January 31 to February 1 meeting. While much of this data should be known by the markets (it’s three weeks old now), the markets remain focused on when more fed funds rate hikes will be coming. The current rate is a 0.50% to 0.75%, but this is expected to keep trickling higher over 2017 and perhaps beyond.

24/7 Wall St. reviews each and every release of this sort. The goal is to identify the hidden gems and to keep our readers from having to go through all of the dullness themselves.

For the most recent February 1 minutes which were released we have broken some of the exact comments out with a bullet on what each portion actually is about.

One interesting aspect is that the FOMC members still see risks that all of the pro-growth policies driving equity prices higher might not materialize. Then there is the “gradual versus sooner” on the timing of rate hikes, as well as a higher ‘neutral rate’ for fed funds. The minutes also includes talk of the balance sheet’s reinvesting that has been happening.

One issue that should be paid attention to closely is that the Fed’s dual mandate of full employment and 2% inflation has now admittedly been greatly expanded into at least four mandates. Other issues were seen from miscommunication risks and under-shooting. Fortunately for the markets, it does not seem as though the Fed is ready to get spooked about inflation too much.

Here are some of the key points we have taken out. The term ‘moderate’ was used 24 times and ‘modest’ was used 8 times; and ‘gradual’ was used 15 times.

EXPANSIONARY POLICIES MIGHT NOT MATERIALIZE: A few participants commented that the recent increase in equity prices might in part reflect investors’ anticipation of a boost to earnings from a cut in corporate taxes or more expansionary fiscal policy, which might not materialize. They also expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook for such policy initiatives.

GRADUAL: Most participants continued to judge that, while the outlook was subject to considerable uncertainty, a gradual pace of rate increases over time was likely to be appropriate to promote the Committee’s objectives of maximum employment and 2 percent inflation. Some participants viewed a gradual pace as likely to be warranted because inflation was still running below the Committee’s objective or because the proximity of the federal funds rate to the effective lower bound placed constraints on the ability of monetary policy to respond to adverse shocks to the aggregate demand for goods and services. In addition, it was noted that the downward pressure on longer-term interest rates exerted by the Federal Reserve’s asset holdings was expected to diminish in the years ahead in light of an anticipated gradual reduction in the size and duration of the Federal Reserve’s balance sheet.

HIGHER NEUTRAL RATE(S): Finally, the view that gradual increases in the federal funds rate were likely to be appropriate also reflected the assessment that the neutral real rate–defined as the real interest rate that is neither expansionary nor contractionary when the economy is operating at or near its potential–was currently quite low and was likely to rise only slowly over time.

RAISING RATES FAIRLY SOON: In discussing the outlook for monetary policy over the period ahead, many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased.

UNDERSHOOTING: Several (participants) judged that the risk of a sizable undershooting of the longer-run normal unemployment rate was high, particularly if economic growth was faster than currently expected. If that situation developed, the Committee might need to raise the federal funds rate more quickly than most participants currently anticipated to limit the buildup of inflationary pressures.

MISCOMMUNICATION: A couple of participants expressed concern that the Committee’s communications about a gradual pace of policy firming might be misunderstood as a commitment to only one or two rate hikes per year and stressed the importance of communicating that policy will respond to the evolving economic outlook as appropriate to achieve the Committee’s objectives.

FED BALANCE SHEET: Participants also generally agreed that the Committee should begin discussions at upcoming meetings about the economic conditions that could warrant changes in the existing policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities, as well as how those changes would be implemented and communicated.

Fed BALANCE SHEET (MORE): The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well under way.

DUAL OR QUADRUPLE MANDATE: The Committee agreed that… it would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate and that the federal funds rate was likely to remain, for some time, below levels expected to prevail in the longer run.

FULL FOMC MINUTES