December FOMC Minutes

Robert Eisenbeis
Sat Jan 7, 2017

While the FOMC’s December rate hike was widely anticipated, there are some noteworthy and somewhat surprising revelations in the minutes released on Wednesday. Three critical observations jump out. First, the general tone of the minutes this time was substantially more upbeat than previously. Virtually all segments of the economy, be it the consumer, business, housing, labor markets, financial market conditions, international developments, or even the recent increases in inflation, seem to indicate substantial progress toward realization of the Committee’s dual mandate. One could almost hear the sigh of relief from the Committee as it opined that current risks are roughly balanced. Second, there were expressions of considerable uncertainty concerning future fiscal policy and related policy developments and what that uncertainty might mean for the trajectory of the economy going forward.

Third, and most importantly, the Committee noted several reasons why the pace of future rate increases is likely to be gradual. There is concern that the target rate is still too close to the zero lower bound and, by implication, that too rapid a pace of rate increases might trigger a downturn, in responding to which the Committee would be constrained by the proximity of the lower bound. There is also considerable uncertainty about where the neutral real rate might be. The consensus seems to be that, for the time being, that rate is low by historical standards, so that a gradual path to returning policy to a neutral stances is warranted. Having said that, the Committee then went on to preserve its policy options by noting that ultimately the actual path will depend upon economic developments and the Committee is ready to either speed up policy normalization or slow the pace down as needed.

This was also the meeting at which the Committee provided its summary of economic projections (SEP). In this regard, one footnote in the minutes really jumps out. It was noted that “One participant did not submit longer-run projections for real output growth, the unemployment rate, or the federal funds rate.” In addition to wondering who withheld those projections and why, we are also curious that there was no mention of whether that participant also failed to provide a projection for the inflation rate. Knowing the precision with which the minutes are constructed and the amount of scrutiny they are afforded by participants and their staffs, one can infer that an inflation forecast was indeed offered by that lone participant. Since the SEP detail shows that 100% of the responding participants thought that 2% on the PCE would be hit, we can only conclude that the lone participant thought that the Committee would achieve its inflation objective but had no idea, or was reluctant to put forward what the likely paths or the equilibria for the other key variables would look like.