Many had not expected the minutes of the 14 December 2016 Federal Reserve meeting released this afternoon to make much news.
After all, Chair Janet Yellen had already provided her take on the committee’s fully expected decision to hike rates and commented on the upward shift in the “dot plot” for 2017 at her scheduled press conference following the meeting. And market pricing for the Fed liftoff has now largely converged up to the Fed’s gradual path toward a low neutral rate.
So with little distance between the markets and the Fed, what did the minutes tell us that we did not already know – or at least surmise?
Three key takeaways
First, the Federal Open Market Committee (FOMC) appears to be finally coming to grips with its ongoing failure to agree on and communicate its policy reaction function, noting that the potential sea change in U.S. fiscal and trade policies will make it “more challenging to communicate to the public about the likely path of the federal funds rate.” They further acknowledged that “it might become necessary to adjust the Committee’s communications about the expected path of the federal funds rate, consistent with the possibility that a less gradual pace of increases could become appropriate.”
Second, the minutes acknowledge that if a booming and reflating U.S. economy compels the Fed to hike more rapidly than the dot plot is now signaling, this could have “implications for the reinvestment of proceeds from maturing Treasury securities” and mortgage-backed securities.
Third, while “about half” of participants incorporated an assumption of more expansionary fiscal policy in their forecasts, the actual revisions to these forecasts relative to the September meeting were in fact quite modest – adding less than .1% to average growth in 2017–2019 and having no impact on the core inflation forecast for 2017-2019. Most estimates agree that the boost to nominal U.S. growth in 2017–2019 from Trumponomics will likely be greater than .1%, which suggests that there is room for the Fed in 2017 to revise up its outlook for the U.S. and perhaps the path for rates.
Trending more hawkish
So these minutes tilted in a hawkish direction relative to expectations, as did the December meeting itself. Does this indicate that the Fed is changing policy? Not yet.
But at a minimum, the Fed’s leadership appears to be coming to grips with the responsibility to agree on what the policy is if they are to have any success in communicating it.
Richard Clarida is PIMCO’s global strategic advisor and a frequent contributor to the PIMCO blog.