Minutes from the Federal Open Market Committee (FOMC) meeting on September 19-20 emphasized continued faith in the economic outlook despite the temporary impact of hurricanes on near-term production and prices.
Participants were impressed with the acceleration in business investment and pointed to signs of optimism among small businesses as supportive of the outlook. They also noted that "tight labor markets were increasing the incentives for businesses to substitute capital for labor or to invest in information technology."
Participants remained generally optimistic on conditions in the labor market and most expected this to lead to higher wages and eventually higher inflation. A minority of participants expressed concern over the persistence of low inflation and the risk that this would weaken inflation expectations.
Key Implications
Differing views on inflation were the main factor behind participants’ divergent views on the future path of monetary policy. Those most concerned about the persistence of soft inflation saw little need for further increases in the federal funds rate, while those concerned about the potential impact of an economy operating above potential and the lags inherent in policy, were the most adamant that rates continue to move higher.
All told, there is still a good case for at least one more rate hike from the Federal Reserve this year. Providing the economic data continue to show improvement (abstracting from the temporary impact of hurricanes) and price growth shows signs of stabilizing, most FOMC members will maintain faith in their forecasts for inflation to move toward target.
By the same token, given the concern among a significant minority of FOMC participants over the persistent weakness in price growth, a meaningful deterioration in either the economic outlook or inflation would be sufficient to stay the Fed’s hand.
