Instant Analysis: August FOMC meeting minutes
Fed staff sees above-trend growth continuing into the second half of the year. The projection for real GDP growth was revised up a little, due to strong consumer spending relative to the forecast prepared for the June FOMC meeting.
Fed staff noted a modest pick-up in various measures of wage growth from where they were a year ago, and participants were generally looking for further improvement. Household spending is being supported by a strong labor market, increasing real personal income, and rising wealth.
Many participants suggested, “It would likely soon be appropriate to take another step in removing policy accommodation.” This means a September rate hike is a near certainty at the next FOMC meeting. Participants generally expected that further gradual rate increases would be necessary to sustain economic growth and keep inflation near the Fed’s 2.0% target over the medium term. Participants also agreed that the FOMC statement language, “the stance of monetary policy remains accommodative,” would soon no longer be appropriate as the Fed funds rate approaches estimates of its neutral level.
All FOMC participants pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risks, noting adverse effects on business sentiment, business investment, and employment. Import tariffs could also reduce consumer purchasing power, reduce productivity, and disrupt supply chains. FOMC participants also noted downside risks from housing and a severe slowdown in emerging markets. Participants also noted elevated asset price valuations and corporate leverage as potential financial vulnerabilities.
A couple of participants mentioned issues related to the operating framework, including the implications of changes in financial market regulations for the demand for reserves and for the size and composition of the Fed’s balance sheet. The chairman suggested the committee will resume discussion of the operating framework in the fall. The Fed has been shrinking its balance sheet at an accelerated pace over the past year (quantitative tightening), and may be re-thinking how far to shrink the balance sheet and when to stop.
I didn’t detect much concern about inflation pressures in the minutes. Nominal wage growth was only picking up gradually, and inflation expectations remain stable. Tariffs are so far having mixed impacts on inflation, with downward pressure on commodity and agricultural prices, though some tariff costs at the consumer level could eventually be passed onto consumers.
Moreover, the FOMC hasn’t reached a consensus on the flat yield-curve debate. The committee appears to be split into two opposing camps. Several participants cited statistical evidence that yield curve inversion has consistently preceded recessions, suggesting participants should pay close attention. Other participants emphasized that statistical correlation is different than causality, and special factors from central bank asset purchases and strong global demand for safe assets may be giving off a false signal this time.
Our baseline Fed funds rate forecast is unchanged based on these minutes. We continue to forecast a Fed rate hike in September and December this year, and a final one in March 2019.