In the minutes of the March 20-21 meeting round, the FOMC generally agreed that after strong fourth-quarter readings, household spending and business investment slowed in the first quarter of the year. However, it was generally agreed that the softness would be transitory and was largely related to delayed tax returns and residual seasonality.
Importantly, participants felt that with further gradual increases in interest rates, the economy would expand at “a solid rate” during the rest of the year, with inflation expected to move up and stay near the 2% target. In general, the outlook was seen as having improved in recent months.
While participants generally did not see the recent steel and aluminum tariffs as impactful to the outlook, a “strong majority” felt that retaliatory actions and uncertainty were downside risks to the U.S. economy.
The federal budget agreement and tax changes were expected to boost growth, but their timing and magnitude were uncertain, particularly given the highly-utilized resources in the economy. The permanence of the tax changes and impact on fiscal health were considered downside risks to the outlook. On the other hand, a few participants believed the stimulus could boost potential output.
Apart for a couple of participants who pointed to benefits of waiting until the subsequent meeting so that inflation data confirms convergence, the remainder of the FOMC viewed a rise in the target rate as appropriate given the current outlook. Moreover, all believed that some further firming in the stance of monetary policy is appropriate, with nearly all believing that a “gradual approach” should be taken, since it would allow for strong labor market conditions and a return to inflation target without requiring an abrupt policy tightening.
It was generally agreed that the equilibrium rate is lower than previously, due to the secular forces that have acted to pressure real interest rates, with some participants suggesting adding such language to the Fed’s statement.
Key Implications
The transition of power from Chair Yellen to Powell appears to have gone rather smoothly, with the minutes of the first meeting chaired by Jerome Powell reading just like those chaired by his predecessor. Ultimately, Chair Powell is unlikely to deviate sharply from the current status quo and is likely to continue to try to build consensus on big decisions within the Committee.
From that standpoint, his first meeting was a success. While there were some disagreements on perennial topics such as the amount of labor market slack, the minutes suggest that the FOMC is more and more in agreement. While some of this is likely related to the maturity of the economic cycle itself, it is nonetheless an important feature that should enable a relatively smooth implementation of monetary policy.
The minutes were notably lacking a thorough discussion of important topics including neutral rates, widening LIBOR spreads, flattening of yield curve, or even the notion of a conference during every meeting. From that standpoint, the Chair has his work cut out for him. Moreover, the minutes shed little light on whether the Fed is likely to deliver two or three more hikes this year. Our own view is for two, but there are notable upside risks present that could very well lead the data-dependent Fed to be more aggressive, with inflation figures likely to be watched very closely by the Committee.
