FOMC Minutes
After separating out what some, most, many, a few and several Fed officials said, here is what is most important even though there is nothing new whatsoever in any of this. Remember that not only did we get a press conference after this September meeting, we’ve heard from just about everyone else since in speeches.
After saying this,
“Increases in most aggregate measures of hourly wages and labor compensation remained subdued, and several participants commented that the absence of broad-based upward wage pressures suggested that the sustainable rate of unemployment might be lower than they currently estimated.”
The minutes said this,
“However, reports from business contacts in several Districts indicated that employers in labor markets in which demand was high or in which workers in some occupations were in short supply were raising wages noticeably to compete for workers and limit turnover. It was noted that the expected increase in demand for skilled construction workers for reconstruction in hurricane-affected areas would likely exacerbate existing shortages. Most participants expected wage increases to pick up over time as the labor market strengthened further; a couple of participants cautioned that a broader acceleration in wages may already have begun, consistent with already-tight labor market conditions.”
The discussion on inflation then went over the different possible reasons for it being still relatively subdued. I’m glad they included what I’ve been harping on for years, “other developments, such as the effects of earlier changes to government health-care programs that had been holding down health-care costs, might continue to do so for some time.” They also discussed the influence of technology in keeping prices muted via heightened competition.
The Fed made clear why they obsess over getting to 2% inflation: “It was noted that the persistence of low inflation might result in the fed funds rate staying uncomfortably close to its effective lower bound.” In other words, the reason why the Fed wants 2% inflation is because it gives them license to have a fed funds rate above that, let’s say 2-4% which they then can use to lower if the US economy slows down. Thus, 2% inflation target is not necessarily what is the best for the US economy but what helps to fill the easing bullets back in their monetary gun.
Don’t expect the inflation prints that we’ll see before the December meeting to influence their desire to hike. “Several of them noted that interpreting the next few inflation reports would likely be complicated by the temporary run-up in energy costs and in the prices of other items affected by storm-related disruptions and rebuilding.”
BUT,
“many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted.”
Bottom line for the December meeting, “many participants thought that another increase in the target range later this year was likely to be warranted if the medium-term outlook remained broadly unchanged.”
BUT,
“Several others noted that, in light of the uncertainty around their outlook for inflation, their decision on whether to take such a policy action would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the Committee’s objective.”
The Fed is hiking again in December I firmly believe. The 2 yr note yield is at the high of this cycle at 1.52% and the 2s/10s spread is narrower by another 1 bp after the 10 yr auction and down by 3 bps on the day.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.