Highlights
The minutes of the September 17-18 FOMC meeting show a committee carefully watching the economic data and prepared to respond. The pivotal reason behind the 50-basis point decrease in the fed funds target rate range to 4.75-5.00 percent decided on at the meeting seems to have been the weakening labor market data as exemplified by the softening in the July monthly employment report and the below-expectations numbers for August. At the time of the meeting the labor market was still deemed as"solid" if a little less tight than conditions just before the pandemic in 2020.
The cooling in the labor market was progressing with businesses"posting fewer openings, reducing hours, or making use of attrition" rather than laying off workers. The minutes said,"A few participants suggested that firms remained reluctant to lay off workers after having difficulty obtaining employees earlier in the post-pandemic period. Some participants remarked that the recent pace of payroll increases had fallen short of what was required to keep the unemployment rate stable on a sustained basis, assuming a constant labor force participation rate. Many participants observed that the evaluation of labor market developments had been challenging, with increased immigration, revisions to reported payroll data, and possible changes in the underlying growth rate of productivity cited as complicating factors."
The minutes said,"With regard to the outlook for the labor market, participants noted that further cooling did not appear to be needed to help bring inflation back to 2 percent." With an"appropriate recalibration" the"labor market would remain solid". Importantly,"Participants agreed that labor market indicators merited close monitoring, with some noting that as conditions in the labor market have eased, the risk had increased that continued easing could transition to a more serious deterioration."
On the side of price stability, the minutes said,"almost all participants judged that recent monthly readings had been consistent with inflation returning sustainably to 2 percent.""Some participants commented that, though food and energy prices had played an important part in the decline in the overall inflation rate, slower rates of price increases had become more evident across a broad range of goods and services. Notably, core goods prices had declined in recent months, and the rate of increase in core nonhousing services prices had moved down further," the minutes continued. The information lined up with anecdotal evidence from business contacts of some FOMC participants. There were still some pockets of elevated inflation such as housing services prices, but these were generally slower.
The inflation outlooks was viewed with"greater confidence" for achieving the 2 percent inflation objective. Among the factors behind the confidence were,"a further modest slowing in real GDP growth, in part due to the Committee's restrictive monetary policy stance; well-anchored inflation expectations; waning pricing power; increases in productivity; and a softening in world commodity prices. Several participants noted that nominal wage growth was continuing to slow, with a few participants citing signs that it was set to decline further. These signs included lower rates of increases in cyclically sensitive wages and data indicating that job switchers were no longer receiving a wage premium over other employees." Nonetheless, inflation was said to remain"somewhat elevated" and that the FOMC remained committed to reaching its inflation goal.
The FOMC as a whole was in agreement that the time had come to remove some policy restriction, the choice of a 50-basis point cut was not unanimous. There are 19 FOMC participants (7 governors, 12 district bank presidents) but on 12 voters at a meeting (7 governors, 5 district bank presidents in a set annual rotation). The meeting vote was 11-1, however, Governor Michelle Bowman was not alone among FOMC participants in preferring a smaller 25-basis point rate cut. The minutes said,"A couple of participants, however, did not perceive an increased risk of a significant further weakening in labor market conditions."
Later in the minutes it was noted,"Some participants noted that there had been a plausible case for a 25 basis point rate cut at the previous meeting and that data over the intermeeting period had provided further evidence that inflation was on a sustainable path toward 2 percent while the labor market continued to cool. However, noting that inflation was still somewhat elevated while economic growth remained solid and unemployment remained low, some participants observed that they would have preferred a 25 basis point reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision. Several participants noted that a 25 basis point reduction would be in line with a gradual path of policy normalization that would allow policymakers time to assess the degree of policy restrictiveness as the economy evolved. A few participants also added that a 25 basis point move could signal a more predictable path of policy normalization. A few participants remarked that the overall path of policy normalization, rather than the specific amount of initial easing at this meeting, would be more important in determining the degree of policy restriction."
Also of note is that"Almost all participants judged that the risks to achieving the Committee's employment and inflation goals were roughly in balance," which suggests that one participant was not convinced the risks of inflation and the labor market were as nearly equal. The minutes said,"almost all participants agreed that the upside risks to inflation had diminished, and most remarked that the downside risks to employment had increased. Some participants emphasized that reducing policy restraint too late or too little could risk unduly weakening economic activity and employment. A few participants highlighted in particular the costs and challenges of addressing such a weakening once it is fully under way. Several participants remarked that reducing policy restraint too soon or too much could risk a stalling or a reversal of the progress on inflation. Some participants noted that uncertainties concerning the level of the longer-term neutral rate of interest complicated the assessment of the degree of restrictiveness of policy and, in their view, made it appropriate to reduce policy restraint gradually."
This suggests that policymakers were more concerned to stay ahead of the risk that the labor market was softening more than previously thought than that a larger rate cuts would set back progress on returning to price stability.
The cooling in the labor market was progressing with businesses"posting fewer openings, reducing hours, or making use of attrition" rather than laying off workers. The minutes said,"A few participants suggested that firms remained reluctant to lay off workers after having difficulty obtaining employees earlier in the post-pandemic period. Some participants remarked that the recent pace of payroll increases had fallen short of what was required to keep the unemployment rate stable on a sustained basis, assuming a constant labor force participation rate. Many participants observed that the evaluation of labor market developments had been challenging, with increased immigration, revisions to reported payroll data, and possible changes in the underlying growth rate of productivity cited as complicating factors."
The minutes said,"With regard to the outlook for the labor market, participants noted that further cooling did not appear to be needed to help bring inflation back to 2 percent." With an"appropriate recalibration" the"labor market would remain solid". Importantly,"Participants agreed that labor market indicators merited close monitoring, with some noting that as conditions in the labor market have eased, the risk had increased that continued easing could transition to a more serious deterioration."
On the side of price stability, the minutes said,"almost all participants judged that recent monthly readings had been consistent with inflation returning sustainably to 2 percent.""Some participants commented that, though food and energy prices had played an important part in the decline in the overall inflation rate, slower rates of price increases had become more evident across a broad range of goods and services. Notably, core goods prices had declined in recent months, and the rate of increase in core nonhousing services prices had moved down further," the minutes continued. The information lined up with anecdotal evidence from business contacts of some FOMC participants. There were still some pockets of elevated inflation such as housing services prices, but these were generally slower.
The inflation outlooks was viewed with"greater confidence" for achieving the 2 percent inflation objective. Among the factors behind the confidence were,"a further modest slowing in real GDP growth, in part due to the Committee's restrictive monetary policy stance; well-anchored inflation expectations; waning pricing power; increases in productivity; and a softening in world commodity prices. Several participants noted that nominal wage growth was continuing to slow, with a few participants citing signs that it was set to decline further. These signs included lower rates of increases in cyclically sensitive wages and data indicating that job switchers were no longer receiving a wage premium over other employees." Nonetheless, inflation was said to remain"somewhat elevated" and that the FOMC remained committed to reaching its inflation goal.
The FOMC as a whole was in agreement that the time had come to remove some policy restriction, the choice of a 50-basis point cut was not unanimous. There are 19 FOMC participants (7 governors, 12 district bank presidents) but on 12 voters at a meeting (7 governors, 5 district bank presidents in a set annual rotation). The meeting vote was 11-1, however, Governor Michelle Bowman was not alone among FOMC participants in preferring a smaller 25-basis point rate cut. The minutes said,"A couple of participants, however, did not perceive an increased risk of a significant further weakening in labor market conditions."
Later in the minutes it was noted,"Some participants noted that there had been a plausible case for a 25 basis point rate cut at the previous meeting and that data over the intermeeting period had provided further evidence that inflation was on a sustainable path toward 2 percent while the labor market continued to cool. However, noting that inflation was still somewhat elevated while economic growth remained solid and unemployment remained low, some participants observed that they would have preferred a 25 basis point reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision. Several participants noted that a 25 basis point reduction would be in line with a gradual path of policy normalization that would allow policymakers time to assess the degree of policy restrictiveness as the economy evolved. A few participants also added that a 25 basis point move could signal a more predictable path of policy normalization. A few participants remarked that the overall path of policy normalization, rather than the specific amount of initial easing at this meeting, would be more important in determining the degree of policy restriction."
Also of note is that"Almost all participants judged that the risks to achieving the Committee's employment and inflation goals were roughly in balance," which suggests that one participant was not convinced the risks of inflation and the labor market were as nearly equal. The minutes said,"almost all participants agreed that the upside risks to inflation had diminished, and most remarked that the downside risks to employment had increased. Some participants emphasized that reducing policy restraint too late or too little could risk unduly weakening economic activity and employment. A few participants highlighted in particular the costs and challenges of addressing such a weakening once it is fully under way. Several participants remarked that reducing policy restraint too soon or too much could risk a stalling or a reversal of the progress on inflation. Some participants noted that uncertainties concerning the level of the longer-term neutral rate of interest complicated the assessment of the degree of restrictiveness of policy and, in their view, made it appropriate to reduce policy restraint gradually."
This suggests that policymakers were more concerned to stay ahead of the risk that the labor market was softening more than previously thought than that a larger rate cuts would set back progress on returning to price stability.
Definition
Detailing the issues of debate and consensus among policymakers, the Federal Open Market Committee issues minutes of its latest meeting three weeks after the meeting.
Description
The FOMC has changed dramatically in the transparency of its operations. It now discloses policy changes at the end of each meeting. Historically, the Fed used to keep investors guessing about policy changes and Fed officials did not appear on the speaking circuit as frequently as they do now.
The Fed's minutes are a market mover as investors and analysts parse each word looking for clues to policy. The minutes include the complete economic analysis compiled by Fed officials and opinions at odds with the consensus.
Investors who want a more detailed description of Fed opinions will generally read the minutes closely. Fed officials also make numerous speeches, which give their views to the public at large.
The Fed's minutes are a market mover as investors and analysts parse each word looking for clues to policy. The minutes include the complete economic analysis compiled by Fed officials and opinions at odds with the consensus.
Investors who want a more detailed description of Fed opinions will generally read the minutes closely. Fed officials also make numerous speeches, which give their views to the public at large.
