« Will the media ever learn basic economics? (natural disaster department) | Main | Katrina: Pushing us to the brink of recession? »
August 30, 2005
FOMC minutes: Measured is as measured does
The word "measured" is in the minutes in a couple of important paragraphs:
The Committee's decision at its June meeting to raise the intended level of the federal funds rate 25 basis points, to maintain an assessment that risks to the goals of price stability and sustained growth were balanced assuming appropriate monetary policy action, and to retain the "measured pace" language was widely expected in financial markets. Over the intermeeting period, however, investors appreciably marked up their expectations for the path of policy, primarily in response to incoming economic data suggesting more strength in spending and output than had been anticipated.
and...
In their discussion of current conditions and the economic outlook, meeting participants noted that aggregate spending appeared to have picked up in recent months by more than anticipated and that current estimates of slack were narrower than those reviewed at the June meeting. In addition, high and rising energy prices were adding to pressures on overall inflation, and energy price increases probably would feed through, at least temporarily, to core measures of inflation. Nonetheless, core inflation recently had been relatively low and inflation expectations remained well contained. Moreover, participants thought that some slowing in final sales was likely later this year as net exports resumed their decline and purchases of automobiles fell back with the expiration of special discount programs. In these circumstances, it appeared that, for now, continued removal of policy accommodation at a measured pace still would likely be sufficient to keep inflation contained, but participants also recognized that the pace and cumulative extent of policy adjustment going forward would depend importantly on economic developments.
But there's more... These are some of the most interesting minutes in quite a while.
Participants viewed the increases in market interest rates over the intermeeting period as an appropriate response to the stronger economic outlook. A few participants voiced concerns that still-low interest rates and insufficient recognition by investors of the dependency of the Committee's policy expectations on economic data were continuing to foster an inappropriate degree of risk-taking in financial markets. Another participant mentioned, however, that recent sluggish growth of the monetary aggregates suggested that the stance of policy was not overly accommodative. Moreover, with a higher proportion of mortgages now tied to short-term rates, it was noted that increases in short-term rates could have a somewhat larger-than-usual effect on spending. On balance, current financial conditions, which embedded expectations of future policy tightening, were generally seen as likely to be consistent with sustained moderate economic growth and containment of pressures on inflation in coming quarters. (emphasis mine)
Ah, there appears to be debate of the sort we've been chronicling. Note how the at this point the minutes are sounding a trumpet call to the market that future policy is going to be dependent on the data. I think that should be crystal clear now. You've been warned.
Participants discussed at length the factors affecting costs and prices. Although uncertainties about the underlying pace of productivity increases, trends in labor force participation, and the level of potential output complicated the inflation outlook, higher energy prices and reduced resource slack were seen as pointing to elevated inflation pressures. While recent monthly readings indicated that core inflation had been subdued, a number of participants noted that underlying core inflation appeared to be running at a pace around the upper end of the range they viewed as consistent with price stability-an assessment that was reinforced by the recent upward revisions to historical data on core PCE inflation. Participants commented that an increase in inflation from recent rates could have especially adverse effects on longer-run economic performance.
Ah, to have been a fly on the wall for that discussion, eh, PGL?
While most participants viewed the risks to inflation as having ticked up over the intermeeting period, many also cited factors that, in concert with the likely continued removal of policy accommodation, would tend to hold inflation pressures in check. For example, few indications had emerged recently that businesses had enjoyed any significant increase in pricing power, and the continuing expansion of global trade was seen as an important factor limiting firms' ability to pass through cost increases. In these circumstances and with markups at relatively high levels, a substantial proportion of any increases in business costs might well be reflected in narrower profit margins. Moreover, the recent relatively low monthly readings on core inflation and modest wage pressures, at least by some measures, suggested that some slack remained in resource utilization. Despite the rise in oil prices and quickening pace of economic activity, both market- and survey-based measures of inflation expectations seemed to remain quite well anchored.
Seems like most of the discussion was about inflation, which is the appropriate thing for a central bank to talk about since it's where they have the biggest effect in the long run. The inflation picture is not unambiguously benign. However, it appears to be held in check, perhaps more than they would have expected given strong GDP data and higher oil prices.
In the Committee's discussion of monetary policy for the intermeeting period, all of the members favored raising the target federal funds rate by 25 basis points to 3½ percent at this meeting. Even with this action, the federal funds rate would remain below the level that members anticipated would prove necessary to contain inflation pressures and keep output near potential, and thus in all likelihood further policy action would be required. However, the pace of future policy moves, although likely to be measured, as well as the extent of those moves, would depend on incoming data.
It's not over, folks. But then, you knew that already, right?
In discussing the statement to be released after the meeting, members agreed that it was appropriate to highlight the apparent strengthening in aggregate spending. Policymakers exchanged views on the characterization of labor market conditions in light of recent employment reports and other indicators, but members ultimately concurred that the description of labor markets as "improving gradually" remained appropriate. Members agreed that it was appropriate to acknowledge the recent relatively low monthly rates of core inflation, but also to emphasize that inflation pressures remained elevated. As in past meetings, there was some discussion about the desirability of including forward-looking language in the statement, but members agreed to retain the forward-looking language for now.
All in all, there are a few tidbits in here that haven't come out in previous minutes. I think these minutes paint quite a picture of how the Fed is concerned that the market needs to take note of the fact that upcoming policy moves are going to be dependent on incoming data. As I said above, you've been warned. Energy prices continue to be a point of interest, and probably will be for some time. Don't look for the Fed to ease (or let up on the increases as the case may be) just to give the economy a break from high oil prices, at least not at this point.
So we know a little more today than we did yesterday. The rate hikes are clearly not over. And some additional increase is probably appropriate given the big picture painted by the data. I still would advocate for a pause in the action in December even if they resume in 2006, just to give the economy a chance for the last couple hikes (which were not anticipated until a few months ago as opposed to a year ago) a chance to sink in.
Posted by William Polley at August 30, 2005 1:34 PM
Trackback Pings
TrackBack URL for this entry:
http://www.williampolley.com/cgi-bin/mt-tb.cgi/322