The minutes from the December FOMC meeting reveal a Committee that remains broadly comfortable with its plans for a steady dose of increases in the policy rate over the course of 2018. As was the case throughout last year, the Committee continues to debate the outlook for inflation against the backdrop of a strong labor market. By and large, a Phillips Curve framework continues to anchor the Committee’s thinking, with “many” meeting participants expecting “cyclical pressures associated with a tightening labor market to show through to higher inflation over the medium term”. A handful of members expressed concern about persistently weak inflation, but these concerns were no more pronounced than in prior meeting minutes.
If anything, relative to the December Summary of Economic Projections and Chair Yellen’s comments during her last press briefing, the inflation discussion was more balanced than I had anticipated. Recall that in December, the median Committee participant projected stronger growth and a lower unemployment rate over the next two years compared to the September projections, but the median core inflation and policy rate projections remained unchanged over that same horizon. Responding to a question about the projections in her press briefing, Chair Yellen had explained that, “inflation has run lower than we expect, and….it could take a longer period of a very stronger labor market in order to achieve the inflation objective.” Her comments had suggested a robust Committee discussion of the inflation outlook, and the possibility that Committee members were growing less confident in their inflation projections. In comparison to these expectations, the inflation discussion was relatively bland and suggests no change in Committee thinking on the inflation outlook. Similarly, the discussion around the appropriate path for the policy rate was very balanced, with “a few participants” indicating they were “not comfortable” with the amount of policy tightening in 2018 as captured by the median projection, and “a few others” arguing for a steeper rate path. This discussion of the policy outlook was entirely consistent with the dispersion of “dots” in the December projections and continued little new information.
I continue to expect four 25 basis point rate increases from the Committee over the course of this year, with the first increase occurring at the March meeting. This outlook is based on the view that the Committee continues to underestimate the strength in the labor market and the outlook for the unemployment rate – there is little to no evidence that the pace of hiring will slow meaningfully this year, especially with growth persisting a good deal above trend. Absent a rise in labor force participation, the unemployment rate should end the year around 3.5 percent – a good distance below the median Committee participant’s 3.9 percent projection. Even if inflation rises only gradually towards two percent this year, the continued steady decline in the unemployment rate should suffice to put the Committee on a somewhat steeper path of rate increases this year compared to the median projection from the December meeting.