WHAT THE LATEST FOMC MINUTES TELL US
Federal Reserve officials have acknowledged that the policy path ahead is less clear after approving an interest rate hike at their most recent meeting. Minutes of the December meeting of the Federal Open Market Committee showed that the rate hike was only reluctantly agreed to by a few members who thought the lack of inflationary pressure argued against another increase.
The members agreed that some further gradual increases in the benchmark rate would be appropriate, but the minutes noted that the low-inflationary backdrop means that the Fed can afford to be patient about further policy increases. The Fed increased its benchmark rate a quarter point to a range of 2.25-2.5%, the fourth hike in 2018 and the ninth since policy normalisation began in December 2015.
The meeting summary stated that with an increase in the target range at this meeting, the key rate will be at or close to the lower end of the range of estimates of the longer-run neutral interest rate. Participants expressed the view that recent developments, including the volatility in financial markets and increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than previously. This indecision was reflected in the different rate forecasts among individual members. Officials cut their expected moves this year from four to two, citing a range of concerns about growth and volatility in the financial markets. Furthermore, the minutes also noted that concerns over escalating trade tensions, global growth prospects, and the sustainability of corporate earnings growth had contributed to the significant drop in US equity prices. The misgivings about future policy increases came before recent public statements from Fed officials suggesting a softening course.
Fed chairman Jerome Powell, in remarks yesterday, said policymakers will be patient when approaching policy decisions. As reflected in the minutes, the prevailing sentiment at the Fed is that the economy remains strong, but they are attuned to the downside risks perceived by the market. In particular there is the risk of a sharper-than-expected slowdown in global economic growth, a more rapid withdrawal of fiscal stimulus, an escalation in trade tensions, a further tightening of financial conditions or a worse-than-expected negative impact from the monetary policy tightening.
The minutes noted that a number of members believe the Fed should assess how these risks might unfold and impact economic activity. Members also stressed that policy is not predetermined and that they still didn’t know the ultimate endpoint for future rate increases. Members discussed removing the forward guidance portion of post-meeting statements that expresses general sentiment about the future path of hikes. Instead, the statements would simply note that the Fed will be data-dependent regarding future increases.
Interestingly, the statement after the December meeting replaced the phrase saying the committee expects that further gradual increases would be appropriate, instead stating that it “judges” some further gradual increases to be coming. Using "judges", as the minutes noted, was a signal to markets of the data-dependency the Fed will employ. Also, "some" was meant to imply a "relatively limited amount" of hikes to come.
Looking to the week ahead, investors will keep focusing on several key US economic indicators, namely the US producer price index, the consumer price index, retail sales, building permits and housing starts. The progress in negotiations between the world's two biggest economies, the US and China, on trade, as well as the ongoing partial government shutdown in the US, should be monitored closely.
Nontakorn Namsopist is an assistant dealer in Bangkok Bank’s treasury division.