The Federal Open Market Committee (FOMC) viewed the labor market as having strengthened since its last meeting. But, while some indications of a pickup in wage increases were visible, this was not apparent in all measures of compensation. Many FOMC members noted that wage pressures were still only moderate or found within specific industries and offered limited evidence of labor market overheating. The jobless rate was expected to remain below, or to decline further below its normal rate, but the potential positive impact on participation from the tightening labor market was not universally accepted.
The recent inflation metrics reassured many Fed members, suggesting to them that last year’s downside surprises were largely transitory. On the other hand, some Fed members viewed the current strength as transitory, pointing to specific increases in health care and financial service prices.
A few participants believed that longer-term inflation expectations may have fallen slightly below those consistent with the Fed’s inflation objective, suggesting that allowing inflation to overshoot would be consistent with the Fed’s “symmetric” inflation objective and may be “helpful” in raising and anchoring longer-run expectations for inflation at an “objective-consistent” level.
Participants viewed the early-year slowdown as transitory, believing that growth is generally running above-trend due to several factors, including stimulative federal tax and spending policies, confident households and businesses, favorable financial conditions, and robust global growth.
Risks were generally seen as being balanced, but there was significant discussion and concern over tariffs and trade restrictions, which could potentially lead firms to postpone or pull back on capital spending, with a retaliatory Chinese tariffs believed to be at risk of hurting U.S. agricultural competitiveness in the longer-run.
The Fed breached the topic of the flattening yield curve, with a few members arguing that the yield curve is a less reliable predictor of economic activity due to factors such as expectation of rate hikes, downward pressure on long-term rates from the Fed’s balance sheet and purchases by other central banks, and a reduction of investor’s view of neutral rates.
Overall, the Committee generally believed that it would likely soon need to “take another step” in removing accommodation, so long as the incoming information remains consistent with the Fed’s outlook.
Key Implications
Despite open debate on several fronts between the more dovish and hawkish members of the FOMC, the discussion captured by the minutes of the May 1-2, 2018 meetings was both informative and enlightening.
The addition of the “symmetric” comment to the statement appears to be (as we argued at the time) a dovish signal, intended to remind investors that the Fed will accept higher inflation. In fact, above-target inflation was viewed as potentially “helpful” in re-anchoring longer-term expectations for inflation that may have fallen due to years of undershooting.
While the risks in the statement were quoted as balanced, the discussion appeared to be much more focused on downside risks stemming from potential trade disruptions and their impacts on sentiment and economic activity.
The Fed largely brushed away the topic of the flattening yield curve, suggesting several reasons for why the common predictor of recessions may not work well this time around.
Whereas the statement suggested more confidence in the inflation outlook, the minutes suggested a more nuanced discussion, with the notion of transitory factors appearing subjective and applied to either the weak figures last year or the strong figures this year by different Committee members.
Overall, while much disagreement persists amongst the Fed as far as the medium-term outlook, the notion of a near-term hike appears to be agreed upon by both dovish and hawkish FOMC members. As such, a June rate hike looks like a done deal – unless the economic data makes a hard turn south or trade tensions flare up further.
