The minutes of the September FOMC meeting didn’t contain any surprises that would lead us to reconsider our expectations for monetary policy. We still expect the FOMC to raise the fund’s rate at every other meeting through September 2019. If anything, these minutes reinforce our expectation that the FOMC will remain comfortable maintaining the current gradual pace of tightening, as there was no sign in the minutes of serious support for slowing that pace.
One passage in the minutes that drew our attention was a brief, somewhat puzzling paragraph describing a discussion of “how much additional policy firming would likely be required for the Committee to sustainably achieve its objectives of maximum employment and 2 percent inflation.” While the wording is extraordinarily clumsy, it appears there are three camps. In the first camp are those who expressed the following view: “A few participants expected that policy would need to become modestly restrictive for a time.” In the second camp are the following: “a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level.” These two camps, as Powell suggested earlier, might have the same fund’s rate projections, albeit with different perspectives motivating their projections. The first camp believes that the appropriate path is an increase in the fund’s rate to above its neutral level—which we take as the median projection of 3%—and hence into restrictive territory, perhaps to 3½%. The other camp thinks that the appropriate path is to a short-run neutral rate which is above the long-term neutral rate—as Brainard has suggested—and perhaps also 3½%. We are a little surprised that the second camp seems to outnumber the first (given that a “number” is larger than a “few”) because that has not been evident in communication from participants. The third camp was apparently the smallest: Only a couple “indicated that they would not favor adopting a restrictive policy stance in the absence of clear signs of an overheating economy and rising inflation.”
The minutes and the accompanying Summary of Economic Projections did not add much to what we already knew about FOMC participants’ projections from the initial release. The incoming spending data were stronger than expected, and changes in financial conditions were mostly offsetting. There was a bit of color added regarding the upward revision to estimates of the longer-run fund’s rate: “The median projection for the longer
run federal funds rate rose slightly, with several participants citing increases in model-based estimates of the longer-run real federal funds rate and strong economic data as reasons for the revision.” Clearly, the upwardly revised estimates of r* from the Laubach-Williams model got their attention.
Relative to previous minutes, there was greater talk of tangible price and wage pressures. The minutes reported that “business contacts and surveys in several Districts also indicated some firming in inflationary pressures. In particular, some contacts indicated that input prices had been bolstered by strong demand or import tariffs. Moreover, several participants reported that firms in their Districts that were facing higher input prices because of tariffs perceived that they had an increased ability to raise the prices of their
products.” Gone was the discussion from previous minutes about price inflation showing a weak connection to labor market slack in recent years. All that said, however, it’s important to note that there didn’t appear to be increased concern about overheating, either. Any increased sense of firming in inflationary pressures was not reflected in their forecasts. Indeed, it was noted only that “Several participants commented that inflation may modestly exceed 2 percent for a period of time.”
Concerning wages, it was a similar story. We saw previous minutes as focusing on reasons why wage growth had not been stronger despite the labor market is tight. We detected a change in tone in these minutes. There was still talk of the labor market being tight: “Contacts in many Districts reported tight labor markets, with difficulty finding qualified workers. In some cases, firms were coping with labor shortages by increasing salaries, benefits, or workplace amenities to attract and retain workers. Other business contacts facing labor shortages were responding by increasing training for less-qualified workers.” What seemed to be a shift was the judgment that “For the economy overall, participants generally agreed that, on balance, recent data suggested some acceleration in labor costs, but that wage growth remained moderate by historical standards, which was due in part to tepid productivity growth.” To be sure, not a tectonic shift, but a change in tone.
Concerns about trade policy again appeared in these minutes. After noting that business contacts were optimistic, it was noted that “several contacts cited factors that were causing them to forego production or investment opportunities in some cases, including labor shortages and uncertainty regarding trade policy. In particular, tariffs on aluminum and steel were cited as reducing new investment in the energy sector. Contacts also suggested that firms were attempting to diversify the set of countries with which they trade—
both imports and exports—as a result of uncertainty over tariff policy. Contacts in the agricultural industry reported that tariffs imposed by China had resulted in lower crop prices, further depressing incomes in that sector, although a new federal program was expected to offset some income losses.” But to us, it appears that the sense of alarm over potential effects has diminished, or at least plateaued. Trade now appears to be only one of several downside risks and not a primary factor in the outlook for real GDP growth. In that regard, the Board staff appear to be taking a similar view, as they deemed that “the recently enacted tariffs on Chinese goods and the retaliatory actions of China were judged to have only a small net effect on U.S. real GDP growth over the next few years.” On technical matters like this one, the views of the Board staff are generally influential with the Committee. Obviously, views will evolve as the outlines of trade policy become clearer.
Another interesting tidbit in these minutes was the mention that, “Following the vote, Chairman Powell noted that he had asked Governor Clarida to serve as chair of a subcommittee on communications issues.” Governor Brainard, President Kaplan, and President Rosengren will also be on the subcommittee, and “The role of the subcommittee will be to help prioritize and frame communications issues for the Committee.” Chair Powell has already shown a willingness to change the FOMC’s communications strategy by having a press conference after every meeting beginning in 2019. So it appears quite possible that further innovations lie ahead. However, we don’t think any major changes are imminent.