FOMC participants, while recognizing the downside risk posed by trade tensions, noted the recent strength in economic growth and expressed confidence in the economic outlook.
Participants noted that inflation is holding near 2% and saw the risks to the outlook as generally balanced. With respect to the impact of tariffs, members noted the offsetting effects of higher tariffs and lower agriculture prices. To this we might add the continued strength of the U.S. dollar.
With forecasts for ongoing steady growth being met, “participants generally expected that further gradual increases in the target range for the federal funds rate would be consistent with a sustained expansion of economic activity.”
In addition to trade risks, participants expressed concern over the impact of fiscal stimulus and its potential unwind on the medium term economic outlook.
As in past meetings, participants debated the implications of a flattening yield curve, with some members cautioning that an inverted yield curve tended to precede recessions. Others warned against inferring causation, noting the myriad global forces weighing on term premiums that may be distorting the signal.
Another topic of conversation was the current level of accommodation relative to the neutral rate. While there is considerable uncertainty around the level of the neutral rate, the general consensus appears to be that as the federal funds rate moves sufficiently close to neutral estimates, comments on the level of accommodation would cease to be appropriate.
Key Implications
The message of these minutes is that trade and fiscal policy uncertainties, while important, remain subordinate to the strength coming through in the economic data. As long as this continues to be the case, the Federal Reserve will continue to nudge up its policy rate at a quarterly frequency (that is quarter point increases once a quarter).
As the Fed gets closer to “neutral” it will continue to re-evaluate its operating framework. As these minutes stated, this will include “the implications of changes in financial market regulations for the demand for reserves and for the size and composition of the Federal Reserve’s balance sheet.” We will be paying close attention to these discussions. Changes in the composition of the balance sheet would likely have some effect on the slope of the yield curve that remains such a hot topic for FOMC members.
