Bottom line with the just released FOMC minutes is this, the only thing the Fed seems comfortable committing to right now is QT in September “absent significant adverse developments in the economy or in financial markets.” As for when the fed funds rate might go up again, everyone had their own opinion that spanned the spectrum of thought, all with regards to the viewpoint on inflation as the labor market objective has been met. As the December meeting is not for another 4 months, it really doesn’t matter what they think now as too much can change. I do want to vent for a quick second. When I hear and read in the minutes that low inflation is a concern, I want to scream. Replace the word ‘inflation’ with ‘cost of living’ and see if it makes sense to want a higher ‘cost of living.’ The point is that there is good deflation (technology, efficiency, higher real wages) and bad deflation (forced selling of assets, cleaning out excess inventory) but the latter NEVER lasts while the former has been going on since the beginning of time. Inflation is a tax and the Fed wants an annual tax of 2%. Use Japan as an example? They’ve actually had true stability and that is just a symptom of the state of their economy, NOT the cause.
I’ll say again my thought on the December notwithstanding its far off. They will hike again if the S&P 500 handles QT relatively well and then use 2018 as a breather if they are not satisfied with the inflation stats. However, QT will remain ongoing as “several reiterated that, once the program was under way, further adjustments to the stance of monetary policy in response to economic developments would be centered on changes in the target range for the federal funds rate.”
The Fed minutes reveal a Fed that is pretty sanguine about the recent modest slowdown in the inflation stats as the staff expressed a forecast that “was little revised from the previous projection, as the recent weakness in inflation was viewed as transitory.” They continue to expect inflation to be near the “longer run objective in 2018 and at 2% in 2019.” The risks also to the projection for inflation was also seen “as balanced.” As for the Fed members, “Many participants noted that much of the recent decline in inflation had probably reflected idiosyncratic factors.” Thus, they don’t expect it to last. They also went on to a discussion of why we have both low inflation and low unemployment (god forbid we have both at the same time) and gave possible reasons why.
The jobs data is where the Fed has the most confidence in, in terms of following thru with QT in September. With respect to the wage increases that they are on the lookout for, “District contacts confirmed tightness in the labor market but relayed little evidence of wage pressures, although some firms were reportedly attempting to attract workers with a variety of nonwage benefits.” They did acknowledge that maybe a key reason for the modest wage gains is more a mix issue rather than anything else. Higher paid baby boomers are retiring and being replaced by lower paid younger workers who are obviously much less experienced. Also, “a number of participants suggested that the rate of increase in nominal wages was not low in relation to the rate of productivity growth and the modest rate of inflation.
After hearing again from Bill Dudley this week citing the easing of financial conditions as a reason to march on with tightening, that too was discussed “however, different assessments were expressed about the implications of this development for the outlook for aggregate demand and, consequently, appropriate monetary policy.” They didn’t seem concerned with the valuations of equities to their delusion but were worried about the impact on smaller banks if commercial real estate ran into trouble.