Fed’s version of reality TV?

11 Apr 2016

Key takeaways

  • Release of the March FOMC meeting minutes revealed rising divergence within the committee
  • Chair Yellen disclosed that the 2% inflation target of the FOMC is “our goal, it’s not a ceiling”
  • Past and present Fed Chairs generally agreed that the economy was in good shape

Full commentary

With little economic news to focus on last week, attention shifted to the Federal Reserve’s (Fed) version of reality television, with a broad cast of celebrities highlighting the drama of setting monetary policy. Release of the minutes of the March Federal Open Market Committee (FOMC) meeting provided fodder for the commentaries and stoked a flame of rising divergence within the committee.  In the parlance used in the minutes, “some” pointed towards continued improvement in labor market conditions, leveling off of oil prices and a firming trend in inflation as foundation for raising interest rates as projected.  “Participants” were supportive of continuing with rate normalization, even debating an April interest rate hike, on the assessment that the domestic economy continued to expand moderately despite global economic and financial developments.  Kansas City Fed President Esther George, the lone dissenter at the March meeting, stood ready to raise rates. She favors “slowly removing accommodation” to reduce risks of fueling asset bubbles, stating the Fed was “tempting fate” by keeping monetary policy exceptionally loose.  Typically considered an interest rate “dove,” Boston Fed President Rosengren stepped forward and opined that the US “has weathered foreign shocks quite well” and believes it “will likely be appropriate to resume the path of gradual tightening sooner than is implied by financial markets futures.”

However, contrary to the comments above, “many” participants expressed concern that the global and financial situation still posed “appreciable downside risks to the domestic economic outlook.”  A quick look at the new “dots” or Summary of Economic Projections, revealed a narrower range of views across the committee as a whole.  New York Fed President Dudley summarized the consensus view regarding “significant uncertainty” about the economic growth prospects abroad and taking time to assess “how this will affect the US economic outlook,” calling for “cautious and gradual approach” to interest rate increases. In her comments, Chair Yellen has also fixated on downside risks from global influences citing “room to raise rates if the economy turns out to be stronger than anticipated, while having less room to ease if growth softened.” She also prefers to proceed with caution, highlighting the “proximity of the zero boundary on interest rates” and asymmetry of risks. In a final blow to rate skeptics, she disclosed that the 2% inflation target of the FOMC is “our goal, it’s not a ceiling.”

In a unique venue with past and present Fed Chairs Yellen, Bernanke, Greenspan and Volcker, leadership spanning 37 years of history of the Fed, added heft to the production.  In discussing the economic outlook, Yellen appeared to have their support as the group generally agreed that the economy was in good shape, the risk of recession was low and fiscal policy needs to play a larger role in promoting growth.

By week’s end, markets were left with the typical feeling of watching too much reality TV:  there were some entertaining moments that actually provided some useful information; but mostly there’s just a feeling of overexposure, wishing you had seen less of the actors.

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