Written exclusively for InTouch Capital Markets
11th April 2018
By Steven K. Beckner
Signs of increased sentiment for more aggressive monetary tightening can be found in minutes of the March 20-21 Federal Open Market Committee meeting, but it’s still far too early to conclude the Federal Reserve’s policymaking body is on the verge of increasing interest rates faster than FOMC participants projected last month.
Nor does the 2.1% year-over-year rise in the core consumer price index herald a more preemptive monetary policy. While the minutes show increased confidence PCE inflation will reach to 2% over the next 12 months in conjunction with a strengthening economy, they also show considerable uncertainty and downside risks on the trade front.
With “all participants” anticipating stronger growth and an increased likelihood of on-target inflation, the minutes say “a number of participants” felt that outlook “implied that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected.”
What’s more, “several participants expressed the judgment that it would likely become appropriate at some point for the Committee to set the federal funds rate above its longer-run normal value for a time.” And “some … suggested that, at some point, it might become necessary to revise statement language to acknowledge that … monetary policy eventually would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic activity.”
But in raising the funds rate 25 basis points to a 1.5% to 1.75% range, actual voters agreed rate increases should stay gradual. Funds rate projections were increased only modestly, with the median for the end of 2020 rising just 30 basis points to 3.4%.
Helping to keep the Fed on a gradual course, the minutes make clear, is uncertainty about fiscal policy, financial conditions and, more recently trade policy.
If anything the minutes are more emphatic about trade concerns than Chairman Jerome Powell let on in his post-FOMC press conference.
“A number of participants reported concern among their business contacts about the possible ramifications of the recent imposition of tariffs on imported steel and aluminum,” the minutes disclose. “Participants did not see the steel and aluminum tariffs, by themselves, as likely to have a significant effect on the national economic outlook, but a strong majority of participants viewed the prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the U.S. economy.”
On inflation, officials’ expectation was that the 12-month PCE price inflation rate “would likely shift upward when the March data are released because the effects of the outsized decline in the prices of cell phone service plans in March of last year will drop out of that calculation.”
The consumer price index report suggests those factors are already “dropping out,” but it hardly showed an outbreak of inflation. Though the year-over-year core CPI rose 2.1% (2.4% overall), the CPI actually fell 0.1% for the month and was up just 0.2% on a core basis. It will take more inflation that that to persuade Powell and the FOMC majority to speed up rate hikes.