January FOMC Meeting Minutes: Change is Coming, Slowly

22 Feb 2018

The January FOMC meeting minutes reveal a Committee becoming increasingly confident in the inflation outlook. Even before the recent upside surprises in wage and CPI data and news of further fiscal stimulus in the form of a 2-year budget deal, “several [participants] commented that recent developments had increased their confidence for further progress toward the Committee’s 2 percent inflation objective.” This increased confidence stemmed from a range of sources including stronger forecasts for economic growth (at least partly due to a reassessment of the near-term effects of the tax cuts), continued accommodative financial conditions, further strengthening in the labor market and a weaker dollar. At the time of the meeting, this confidence does not appear to have translated into upward revisions in inflation projections – the Committee by and large still sees inflation moving up to two percent over the medium term. But clearly the downside risks to inflation, as perceived by the Committee as a whole, were less than they were at the time of the December meeting.

There is a certain whiff of staleness to these minutes given recent data and fiscal policy developments and also the decline in equity markets, which had not gathered steam at the time of the January meeting. So how do these recent developments impact the policy outlook? At the very least, I expect an upward revision to the 2018 median growth projection at the March meeting, to more fully incorporate the effects of tax cuts on household and business spending. It is also possible that some Committee members will begin to incorporate the two-year spending deal in their March projections, especially if the necessary appropriations bills are signed into law by that point in time. What is less clear is whether the median inflation and policy rate projections will be revised at the March meeting. Recent comments from Committee participants, including comments made after the two-year budget deal was struck, suggest no significant changes in inflation forecasts and a general sense that the Committee can still afford to be gradual in removing accommodation. The title of an early February speech by San Francisco Fed President John Williams – “Expecting the Expected: Stay Calm When the Data Meet the Forecasts” – captures what can be described as the Committee’s “wait and see” approach to inflation and policy forecast revisions. Unless there are upside surprises to the February CPI and PPI data, I expect the median 2018 policy rate projection to remain at its current level at the March meeting.

The minutes also contain a brief discussion of the evolution of financial conditions over the intermeeting period. Participants “viewed the economic effects of the decline in the dollar and the rise in equity prices as more than offsetting the effects of the increase in nominal Treasury yields”. Of course, since the meeting financial conditions have tightened somewhat as equity prices have fallen, the trade-weighted dollar has appreciated a bit and nominal Treasury yields have continued to rise. However, the overall impact of these moves has been relatively minor thus far, and the Committee will not be particularly concerned by this tightening in conditions given just how accommodative conditions have remained since it began raising the target for the federal funds rate in December 2015. In addition, the economic impact of the recently announced spending measures will more than offset the impact of recent financial market developments. On net, the recent combined news on fiscal stimulus and financial conditions only increases my confidence in my projection for four 25 basis point rate increases this year, even if the Committee is somewhat slow to signal this in its projections.