Federal Open Market Committee (FOMC) members noted little change to the economic or labor market outlook, but spent a considerable time pondering the “the softness in inflation” and how to react to it.
While most members saw inflation returning to two percent over the medium term, “many…saw some likelihood that inflation might remain below two percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside.”
Balancing some of the concern around soft inflation was an opposing perspective that financial conditions had eased despite gradual policy tightening.
FOMC members largely agreed to the timing of balance sheet normalization. The minutes noted that: “participants generally agreed that, in light of their current assessment of economic conditions and the outlook, it was appropriate to signal that implementation of the program likely would begin relatively soon, absent significant adverse developments in the economy or in financial markets.”
Key Implications
No major surprises here. Just like everyone else, FOMC members are trying to understand why inflation is decelerating even as the economy continues to tighten. There is not one simple answer, but the Fed meeting minutes showed members discussing some of the potential factors, namely a weakened relationship between resource slack and inflation, a lower natural rate of unemployment, greater lags in the relationship between tightening and inflation, and restraints on pricing power from technology and globalization.
Despite the debate, the orthodoxy appears to be holding and most members continue to believe that a hot economy will eventually push price growth higher. Nonetheless, there appears to be enough doubt in the minds of members to take a wait and see approach. This would appear to bar the door on any immediate increase in policy rates (in September) and suggests that a December hike will require at least some evidence that inflation is moving higher.
At the same time, there appears little disagreement on the need to begin normalizing the size of the balance sheet or the general belief that this should have little effect on the broad conduct of monetary policy, which the FOMC hopes to achieve mainly through adjusting the federal funds rate target.
