Highlights
The minutes of the May 6-7 FOMC meeting reflect conditions three weeks ago. If the FOMC was generally sanguine about current conditions and the resilience of the US economy, it was faced with an unsettled environment around trade and tariff policy that elevated the risks to both sides of the dual mandate and presented a high uncertain outlook. With reasonably healthy economic data for growth, the labor market, and inflation on one hand and rapidly altering policy from the White House on the other, the FOMC maintained the fed funds target rate range at 4.25-4.50 percent.
The manager of the Open Market desk said market conditions had, significant market volatility over the intermeeting period, longer-maturity Treasury yields rose, broad equity price indexes changed little on net, credit spreads widened, and the dollar depreciated. The manager observed that market participants appeared to interpret recently announced trade policy changes as a negative supply shock that could restrain domestic activity relative to foreign activity in the near term. Nonetheless, money market functioning had remained orderly.
The staff forecast said, The staff continued to note the large amount of uncertainty surrounding trade policy and other economic policies and now viewed the uncertainty around the projection as elevated relative to the average over the past 20 years. Risks to real activity were seen as skewed to the downside, and the staff viewed the possibility that the economy would enter a recession to be almost as likely as the baseline forecast.
FOMC participants did not mention a recession and saw the uncertainty about their economic outlooks as unusually elevated with downside risks to employment and economic activity and upside risks to inflation had risen, primarily reflecting the potential effects of tariff increases.
With labor market conditions broadly in balance, growth at a solid pace, and inflation somewhat elevated, the FOMC judged it could be patient in regard to interest rate policy while continuing to reduce the size of the balance sheet.
The FOMC spent some time discussing the current 5-year review of monetary policy strategy, tools, and communications. The focus was on the lessons to be learned from the actions take around the COVID-19 pandemic and the recent episode of inflation. If there has been speculation that the Fed would abandon its 2 percent inflation objective, the minutes should quiet it. The minutes said, In their discussions, participants strongly reaffirmed their commitment to the 2 percent longer-run inflation objective and to the importance of longer-term inflation expectations being firmly anchored at that target rate. They emphasized that anchored inflation expectations help the Committee in achieving price stability, thereby enhancing the Committee's ability to promote maximum employment. Some participants also noted that short-term inflation expectations matter for economic decisions and can affect the persistence of inflation. Participants agreed that a commitment to its explicit 2 percent inflation objective, along with anchored longer-term inflation expectations at that level, enhances the Committee's transparency and accountability and bolsters the effectiveness of monetary policy.
What might change is how the Fed communicates its inflation objective. Where the flexible average inflation target was effective in the period when inflation was below objective, it may be less so in conveying the FOMC's reasoning when inflation is above target. The minutes said Participants noted, however, that the strategy of flexible average inflation targeting has diminished benefits in an environment with a substantial risk of large inflationary shocks or when ELB risks are less prominent. Participants indicated that they thought it would be appropriate to reconsider the average inflation--targeting language in the Statement on Longer-Run Goals and Monetary Policy Strategy.
The manager of the Open Market desk said market conditions had, significant market volatility over the intermeeting period, longer-maturity Treasury yields rose, broad equity price indexes changed little on net, credit spreads widened, and the dollar depreciated. The manager observed that market participants appeared to interpret recently announced trade policy changes as a negative supply shock that could restrain domestic activity relative to foreign activity in the near term. Nonetheless, money market functioning had remained orderly.
The staff forecast said, The staff continued to note the large amount of uncertainty surrounding trade policy and other economic policies and now viewed the uncertainty around the projection as elevated relative to the average over the past 20 years. Risks to real activity were seen as skewed to the downside, and the staff viewed the possibility that the economy would enter a recession to be almost as likely as the baseline forecast.
FOMC participants did not mention a recession and saw the uncertainty about their economic outlooks as unusually elevated with downside risks to employment and economic activity and upside risks to inflation had risen, primarily reflecting the potential effects of tariff increases.
With labor market conditions broadly in balance, growth at a solid pace, and inflation somewhat elevated, the FOMC judged it could be patient in regard to interest rate policy while continuing to reduce the size of the balance sheet.
The FOMC spent some time discussing the current 5-year review of monetary policy strategy, tools, and communications. The focus was on the lessons to be learned from the actions take around the COVID-19 pandemic and the recent episode of inflation. If there has been speculation that the Fed would abandon its 2 percent inflation objective, the minutes should quiet it. The minutes said, In their discussions, participants strongly reaffirmed their commitment to the 2 percent longer-run inflation objective and to the importance of longer-term inflation expectations being firmly anchored at that target rate. They emphasized that anchored inflation expectations help the Committee in achieving price stability, thereby enhancing the Committee's ability to promote maximum employment. Some participants also noted that short-term inflation expectations matter for economic decisions and can affect the persistence of inflation. Participants agreed that a commitment to its explicit 2 percent inflation objective, along with anchored longer-term inflation expectations at that level, enhances the Committee's transparency and accountability and bolsters the effectiveness of monetary policy.
What might change is how the Fed communicates its inflation objective. Where the flexible average inflation target was effective in the period when inflation was below objective, it may be less so in conveying the FOMC's reasoning when inflation is above target. The minutes said Participants noted, however, that the strategy of flexible average inflation targeting has diminished benefits in an environment with a substantial risk of large inflationary shocks or when ELB risks are less prominent. Participants indicated that they thought it would be appropriate to reconsider the average inflation--targeting language in the Statement on Longer-Run Goals and Monetary Policy Strategy.
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.
