Beckner: FOMC Minutes, Current Comments Reinforce Gradual Rate Hike Message

Written exclusively for InTouch Capital Markets

21st February 2018

By Steven K. Beckner

Minutes of the Jan. 30-31 Federal Open Market Committee meeting show the Federal Reserve policymaking body plans on raising interest rates, but not as aggressively as some had feared. This should have come as no surprise, but Wall Street is taking it very well nonetheless.

Much was made of a small wording change the FOMC made in its Jan. 31 policy statement, saying it “expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.” The word “further” was added.

But the minutes tend to downplay the significance of that word even while acknowledging its insertion: “Members agreed that the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate. They therefore agreed to update the characterization of their expectation for the evolution of the federal funds rate in the post meeting statement to point to ‘further gradual increases’ while maintaining the target range at the current meeting.”

But the minutes go on to emphasize that “members continued to anticipate that the federal funds rate would likely remain, for some time, below levels that were expected to prevail in the longer run.” And they reiterated “the actual path for the federal funds rate would depend on the economic outlook as informed by the incoming data.”

Minneapolis Fed President Neel Kashkari, who has opposed every rate hike since taking office, also minimized the wording change before the minutes were released. “Wall Street overreacts to everything,” he said. “They overreact on the upside, they overreact on the downside. We can’t make policy based on market blips up and down.”

Other contemporaneous comments suggest little change in the gradual tightening strategy.

Dallas Fed President Robert Kaplan, who ended up voting for the December rate hike after previously expressing reservations, said that based on expectations of 2.5-2.75% growth, falling unemployment and rising inflation, the Fed “should be gradually and patiently raising the federal funds rate during 2018” so as to “increase the likelihood of extending the economic expansion in the U.S.”

Philadelphia Fed President Patrick Harker took a more gradual approach than the FOMC projected in December: “Based on the relatively strong economy, but the continued stubbornness of inflation, I’ve penciled in two hikes for 2018.”