The September FOMC Minutes: No meaningful surprises

THE minutes from the September Federal Open Market Committee (FOMC) meeting were essentially in line with our narrative.

The FOMC members continued to interpret the current economic conditions as “strong” overall and were unanimously in support of continuing with their plan of gradual policy normalisation, with an eye on ongoing developments based on the data.

Thus, market participants are watching closely for any sign of an economic exhaustion.

The minutes also offered some additional insight into the committee’s decision to remove the language describing the stance of policy as “accommodative”.

All said, we see nothing in the minutes that would affect our call of one more rate hike this year, followed by three more quarterly hikes next year.

The decision to drop the word “accommodative” in characterising the monetary policy seemed to have been unanimous, and the minutes provide a number of reasons for this.

It builds on the Fed chairman’s discussion in a post-meeting press conference, which we interpreted as indicating the that Fed will likely conduct a policy that has more on “feel” and less on a model-based forecasts.

A break from conventional theoretical policy.

In particular, the change appears to have been motivated by the view that waiting until further rate increases to happen before dropping the language would convey a “false sense of precision” about the appropriate longer-run neutral rate, in light of the considerable uncertainties surrounding estimates from various approaches.

The September statement was also seen as an opportunistic time to work in the change because the new target range for the policy rate communicated in the statement would be accompanied by SEP projections showing that the range remains below members’ assessments of a neutral rate.

The minutes also stressed that estimates of the neutral funds rate were but one of many factors that the committee would be considering in making its policy decisions.

The FOMC continued to characterise the state of the economic activity as “rising at a strong rate” and expects the labour market conditions to continue to strengthen.

“Strong” remains the committee’s preferred adjective for describing the state of the economy, and its use in the FOMC statements has risen significantly this year compared with 2017 .

Participants pointed to a number of favourable factors – strong labor market conditions, fiscal stimulus, accommodative financial conditions, solid household balance sheets and high levels of business and household confidence – as supporting their outlook for above-trend growth.

The staff assessed that the natural rate of unemployment was slightly lower than previously assumed, which led them to lower the unemployment rate projection over the medium term.

On inflation, the participants viewed the recent developments as consistent with their expectations of achieving the two per cent target on a sustained basis.

Several participants commented that inflation may modestly exceed the target “‘for a period of time.” “A couple” of participants, however, noted that inflation expectations were still below levels consistent with the two per cent target and needed to rise modestly to achieve the target on a sustained basis.

In terms of risks to the outlook, participants generally agreed that they were “roughly balanced”.

Some pointed to downside risks from the trade policy, while others noted the financial stress in emerging markets which also pose some risk.

All in all, rates will likely continue to hike given the strong economic backdrop which will push dollar index higher and bond yield higher as well.

This could be a cautionary tale for market participants going forth.