Although the Fed’s most recent meeting occurred just three weeks ago, the minutes of that meeting released this afternoon had already gone stale.
Not possessing ESP or a reliable crystal ball, the Federal Open Market Committee (FOMC) did not assess a scenario for a Trump victory and the associated repricing of bonds, equities and currencies – not to mention repricing of the Fed’s own interest rate lift-off path. Suffice it to say the minutes of the November 1 and 2 Fed meeting are very consistent with the statement released after that meeting.
The minutes reveal a committee that had expected to hike at the meeting on December 13-14. Developments since then – especially the prospects for fiscal expansion that would reflate a fully employed U.S. economy – could only have strengthened the case.
Monetary policy framework intact
Reading more deeply into the minutes, we learn that the committee received a staff briefing on alternative potential long-run frameworks for monetary policy operating regimes and balance sheet management. Of perhaps most interest was the revelation that “most participants did not indicate support for using the balance sheet as an active tool in other situations,” unless, such as in recessions, where the zero lower bound is binding.
The minutes also went out of the way to say that no changes to the monetary policy framework are imminent and that the Fed would proceed “cautiously” and any changes of this sort would be communicated well in advance.
Finally, the labor market discussion noted an important point also made by Tiffany Wilding in her post, “U.S. Labor Market: How Much ‘Room to Run’?” The Fed’s minutes said:
“Many participants commented on the rise in the labor force participation rate since late 2015. A few of them noted that the increase 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.”
For this reason, the pickup in participation evident in the U.S. data is not an indication of the “additional slack” in the labor market that some Fed officials have suggested. Moreover, while the minutes reveal a desire of some participants to allow the unemployment rate be pushed below the NAIRU (the non-accelerating inflation rate of unemployment), the goal would be to speed up the return of inflation to 2%.
There is no mention in the minutes of desiring even a modest overshoot of PCE inflation above the 2% target. (Personal Consumption Expenditures is the Fed’s preferred inflation measure.) While the committee is entitled to its objective function, it is not entitled to ignore the laws of arithmetic – as it does when some members say that the 2% target is supposed to be an average not a ceiling.
Richard Clarida is PIMCO’s global strategic advisor and a regular contributor to the PIMCO Blog