The most recent FOMC meeting minutes expressed more of a divergence than usual. What is keeping the Fed from a consensus?

It may not be part of their official mandate, but the Fed is quite conscientious of their communication to the outside world. Not doing so bears the risk of disrupting financial markets, contradicting the aim of price stability. Uniform communication helps make the FOMC’s intentions clear, allowing investors to build their expectations accordingly.

Yet, the nature of monetary policy is prospective and inherently bears a basket of unknowns. Policymakers are bound to have disparate views, and projecting them accurately under one policy umbrella can be challenging. Members must converge on policy decisions to effectively guide markets on monetary policy. Here we examine what the latest FOMC meeting minutes are telling us about the conversations behind the door of the Eccles Building.

The Policy Unknowns

Members once again made note of the potential impact of policies from Washington – emphasis on the word potential. Generally, “many participants continued to view the possibility of expansionary fiscal policy changes.” However, this was taken with a grain of salt. The prospect of fiscal spending on things like infrastructure “remained highly uncertain” to the Committee. They question what these policies would look like in terms of size, scope, and whether or not they would materialize in the current climate.

One district in particular reported that ambiguity about the changes in trade and regulatory policies was weighing on capital spending. Overall, their comments were in line with “market perceptions of a reduced likelihood of domestic fiscal and regulatory policy change,” which we have seen materialize in the reversal of the Trump trade.

Inflation

Inflation continues to elicit mixed responses from the FOMC. While some participants specifically noted that CE inflation has been running below the 2% objective for eight years now. Several others took a more positive spin, emphasizing that inflation measured on an annual basis had been running very close to the Committee's target. Both statements are equally true, but together they highlight the upside and downside of the current macro environment.

The outlook is slightly more disjointed. The minutes noted that a couple of participants saw upside risks to the inflation outlook should the longer-run normal rate of unemployment drop substantially. However, “several others continued to see downside risks to the inflation outlook” given weaker readings in prior months combined with lagging wage growth. That being said, the Committee continued to maintain that “most participants” blamed transitory factors for the weakness seen in Q1, outpacing fragmented concerns that progress towards the 2% objective may have slowed. 

Employment

Contention also carried through in the labor market which continues to expand. Where FOMC members noted that conditions continued to strengthen in recent months, not all saw this evenly across their districts. Wages have been slow to pick up, and while some areas noted gains in earnings, several others estimated a gap that could be filled by unemployed persons without necessarily pushing wages higher.

Wait and See

Taking a page from their data-dependent playbook, participants agreed that the Committee should continue to closely monitor inflation indicators and developments abroad. So while “participants generally reiterated their support for a continued gradual approach to raising the federal funds rate,” the timing and scope seems to be scaling back somewhat.  

 

Natalie Ciavarella is an Economic Strategist for World First North America.

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