24/7 Wall St.

If you thought that one Federal Reserve FOMC meeting had a lot of details, there are always the expanded FOMC meeting minutes which give investors another look into how to interpret what the Fed officials were really thinking.

It is important to consider that the January 30 to January 31 FOMC meeting was effectively the changing of the guard now that Jerome Powell has replaced Janet Yellen as Chairman of the Federal Reserve. This was the last FOMC meeting with Janet Yellen on as Chair. The Fed also issued a reaffirmed statement on the longer-run goals and monetary policy strategy.

What also need to be considered is that the financial markets had not yet entered into the short-term panic mode, even if they did not a slight pickup in teh volatility indexes that was still quite low by historical standards.

The January 31 statement at the time of Yellen’s last meeting said:

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

The minutes showed a staff review of the current financial situation, and this was introduced as follows:

Domestic financial market conditions eased considerably further over the intermeeting period. A strengthening outlook for economic growth in the United States and abroad, along with recently enacted tax legislation, appeared to boost investor sentiment. U.S. equity prices, Treasury yields, and market-based measures of inflation compensation rose, and spreads of yields on investment- and speculative-grade nonfinancial corporate bonds over those for comparable-maturity Treasury securities narrowed further. In addition, the dollar depreciated broadly amid strong foreign economic data and monetary policy communications by some foreign central banks that investors reportedly viewed as less accommodative than expected.

Other issues were shown as still having somewhat easy credit and “accommodative” and expansionary views:

• Financing conditions for nonfinancial businesses and households remained generally accommodative over the intermeeting period and continued to be supportive of economic activity.
• The staff provided its latest report on the potential risks to financial stability; the report continued to characterize the financial vulnerabilities of the U.S. financial system as moderate on balance.
• Beyond 2017, the forecast for real GDP growth was revised up, reflecting a reassessment of the recently enacted tax cuts, along with higher projected paths for equity prices and foreign economic growth and a lower assumed path for the foreign exchange value of the dollar.
• The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced.
• Participants characterized their business contacts as generally upbeat about the economy; their contacts cited the recent tax cuts and notable improvements in the global economic outlook as positive factors.

There is good news here on the inflation front with the Fed seeming to believe that inflation wages and inflation were still nowhere close to out of hand. The more recent data have shown that the inflationary pressures were hotter than what was being seen by the Fed, but that was largely after the FOMC meeting date. Fed commentary on inflation and wages was shown below:

• The projection for inflation over the medium term was revised up slightly, primarily reflecting tighter resource utilization in the January forecast. Total PCE price inflation in 2018 was projected to be somewhat faster than in 2017 despite a slower projected pace of increases in consumer energy prices; core PCE prices were forecast to rise notably faster in 2018, importantly reflecting both the expected waning of transitory factors that held down 12-month measures of inflation in 2017 as well as the projected further tightening in resource utilization. The staff projected that core inflation would reach 2 percent in 2019 and that total inflation would be at the Committee’s 2 percent objective in 2020.
• The risks to the projection for inflation also were seen as balanced.
• On a 12-month basis, both overall inflation and inflation for items other than food and energy continued to run below 2 percent. Market-based measures of inflation compensation increased in recent months but remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.
• Inflation on a 12-month basis was expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term. However, participants judged that it was important to continue to monitor inflation developments closely.
• A few participants judged that while the labor market was close to full employment, some margins of slack remained; these participants pointed to the employment-to-population ratio or the labor force participation rate for prime-age workers, which remained below pre-recession levels, as well as the absence to date of clear signs of a pickup in aggregate wage growth.
• While some participants heard more reports of wage pressures from their business contacts over the intermeeting period, participants generally noted few signs of a broad-based pickup in wage growth in available data.
• Many participants thought that inflation expectations remained well anchored and would support the gradual return of inflation to the Committee’s 2 percent objective over the medium term.

After all of that has been included, the FOMC does seem to still be committed to raising rates. There was also a mention of what a “neutral rate” might be ahead. The minutes said:

• A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.
• By most estimates, the neutral level of the federal funds rate had been very low in recent years, but it was expected to rise slowly over time toward its longer-run level. However, the outlook for the neutral rate was uncertain and would depend on the interplay of a number of forces.

Many more details of actions, opinions, and longer-term views can be found in the FULL FOMC MINUTES.