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FOMC Meeting Minutes from December 18-19, 2018 are a little stale

The three-week gap between an FOMC meeting and the release of the meeting minutes is particularly significant this time around. The tone of the discussions at the December 18-19 meeting may well have been overtaken by events in terms of the assessment of risks to the economic outlook.

Data released since the meeting have been generally supportive of the decision to hike the fed funds target rate range to 2.25%-2.50%. In particular, the December Employment Situation on January 5 was unusually strong for payroll gains and quite solid for increases in wages. If there are signs of overall slowing in economic growth, that has not yet reached businesses hiring new workers. Inflation data reflected the impact of a rapid decline in gasoline prices that did not change that the underlying trend remains close on the Fed’s 2% objective.

However, markets took a hit in the days following the meeting with rumors that President Trump was considering firing Fed Chair Powell, and when it became clear that there would be no last-minute budget agreement to prevent a partial shutdown of the federal government. While the White House walked back chatter about a possible removal of Powell as Chair and stemmed some of the plunge in equity markets, the government shutdown has lengthened. The uncertainty about a resolution adds to the negative economic impacts at national, state, and local levels, as well as influencing business and consumer confidence.

Under the circumstances, any discussion of the risks to the economy before December 20 cannot encompass the actuality of the prior three weeks. To be sure, the tone of the discussions as reflected in the meeting statement and Summary of Economic Projections, and the Chair’s press briefing indicated a somewhat more dovish outlook for removal of accommodation via interest rates. Since then, public comment from Fed officials indicate that some are becoming even more cautious until the present situation is resolved.

At the time of the December meeting, “Participants who downgraded their assessment of the economic outlook pointed to a variety of factors underlying their assessment, including recent financial market developments, some softening in the foreign economic growth outlook, or a more pessimistic outlook for housing-sector activity.”

The outlook for the economy was generally about the same, “[C]ontacts in a number of Districts appeared less upbeat than at the time of the November meeting, as concerns about a variety of factors–including trade policy, waning fiscal stimulus, slowing global economic growth, or financial market volatility–were reportedly beginning to weigh on business sentiment. A couple of participants commented that the recent decline in oil prices could be a sign of a weakening in global demand that could weigh on capital spending by oil production companies and affect companies providing services to the oil industry.” There were also comments that contacts in agriculture noted “conditions remained depressed, in part because of the effects on trade policy actions on exports and farm incomes, uncertainty about future trade agreements, and continued low commodity prices.”

The labor market was characterized as “strong” and experiencing above trend growth. There was some debate about remaining slack in the labor market, but it was noted by several participants that “labor force participation had been improving for low-skilled workers and for prime-age workers.” Many Districts’ contacts “continued to report tight labor markets with difficulties finding qualified workers” which was being address with some combination of nonwage incentives and higher wages.

Recent dips in inflation were attributed largely to lower oil prices, and inflation compensation was down “concurrent with both falling oil prices and a deterioration in investor risk sentiment.” Survey-based measures of inflation expectations appeared well anchored and likely to remain so.

Financial markets were observed to have been “volatile and financial conditions had tightened over the intermeeting period, as equity prices declined, corporate credit spreads widened, and the Treasury yield curve continued to flatten. Some participants commented that these developments may reflect an increased focus among market participants on tail risks such as a sharp escalation of trade tensions or could be a signal of a significant slowdown in the pace of economic growth in the future.” The Committee agreed to continue to watch and wait, “and assess the implications.”

Downside risks to the economy were from “Various factors that could pose downside risks for domestic economic growth and inflation were mentioned, including the possibilities of a sharper-than-expected slowdown in global economic growth, a more rapid waning of fiscal stimulus, an escalation in trade tensions, a further tightening of financial conditions, or greater-than-anticipated negative effects from the monetary policy tightening to date.”

Upside risks were enumerated as, “[T]he effects of fiscal stimulus could turn out to be greater than expected and the uncertainties surrounding trade tensions or the global growth outlook could be resolved favorably, leading to stronger-than-expected economic outcomes, while a couple of participants suggested that tightening resource utilization in conjunction with an increase in the ability of firms to pass through increases in input costs to consumer prices could generate undesirable upward pressure on inflation.”

In any case, at the time of the meeting, policymakers were satisfied that growth was proceeding about as expected and a 25 basis point rate hike was warranted. However, “[M]any participants expressed the view that, especially in an environment of muted inflation pressures, the Committee could afford to be patient about further policy firming. A number of participants noted that, before making further changes to the stance of policy, it was important for the Committee to assess factors such as how the risks that had become more pronounced in recent months might unfold and to what extent they would affect economic activity, and the effects of past actions to remove policy accommodation, which were likely still working their way through the economy.” [emphasis added]

If there was an inclination to go more slowly on rate hikes at the time of the meeting, it will almost certainly have deepened with events of recent weeks. Even if progress is made on trade talks with China, the impacts of the government shutdown will need time to be assessed, as much for their initial effects as some months down the road. The shutdown will result in lost spending that may never be recovered even if workers’ pay and government contracts are made good at the end.

The January 29-30 meeting of the FOMC will be followed by a press briefing from Chair Jerome Powell, but not an update to the Summary of Economic Projections. Powell is likely to get a grilling on if the FOMC is going to further downgrade its forecasts for 2019 and 2020.

 

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