Submitted by Tyler Durden – ZeroHedge
The FOMC went with an ultra-dovish “clean relent” in September, and shifted the reaction function to include international financial markets in what was presumably an effort to avoid sparking an EM meltdown. Confusion reigned.
Then, in October, they decided that was probably a communication error and so they switched gears and leaned hawkish in the statement.
What’s now become clear is that this is all ad hoc. There’s no consistency to the message, there’s no continuity, and these decisions are being made on a meeting-to-meeting basis based on who knows what.
Fortunately, there’s one man who, like Ben Bernanke, has the “courage” to cut through the fog and explain the unexplainable. That man is Jon Hilsenrath, and his take on the October Fed minutes is presented below.
Federal Reserve officials meeting last month anticipated it “could well be” time to raise short-term interest rates at a December policy meeting after keeping them pinned near zero for seven years.
Fed officials thus decided to change the wording of their Oct. 28 policy statement to ensure their options were open for a move in December, according to minutes of the October meeting released Wednesday with the regular three-week lag.
“Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting,” the minutes said.
Since the gathering, economic data have generally supported the Fed’s view that the job market is improving and offered some evidence wage and inflation pressures are slowly and gradually starting to build. The Labor Department early this month reported the U.S. unemployment rate dropped to 5% in October and hiring accelerated after slowing in August and September. Wages picked up and the Labor Department’s consumer price index, released this week, also showed inflation outside of the food and energy sector firmed in October.
Fed officials next meet Dec. 15-16. Futures markets are pricing in an increased probability of a quarter-percentage-point increase in rates at that meeting.
The minutes said “some” Fed officials felt in October it was already time to raise rates. “Some others” believed the economy wasn’t ready. The wording meant that minorities on both sides of the Fed’s rate debate are pulling in different directions, with a large center inside the central bank was inclined to move.
The Fed added a reference in its October statement to the December meeting as potential liftoff date.
“Members saw the updated language as leaving policy options open for the next meeting,” the minutes said.
Officials cited a number of reasons to avoid delay: They risked creating uncertainty in financial markets by holding off; they risked allowing financial market excesses to build due to low rates; they risked signaling a lack of confidence in the economy if they didn’t move rates higher; they would be ignoring cumulative gains in the economy already registered. The jobless rate, for example, has dropped in half from a peak of 10% after the financial crisis.
At the same time, the Fed minutes included several new signals that after the Fed does move rates higher, the subsequent path of rate increases is likely to be exceptionally shallow and gradual.
Before discussions in the two-day gathering turned to the economy and rate decision, Fed staff presented an analysis of the likely outlook for short-term interest rates in the years ahead. The equilibrium real interest rate—meaning the interest rate, adjusted for inflation, consistent with low and steady unemployment—has been near zero of late, the staff concluded. It will gradually rise as the economy strengthens, but not much. Low productivity growth and an aging population are putting downward pressure on growth and rates that could persist, the staff concluded.
Fed officials largely agreed, concluding the Fed’s target fed funds rate “would likely be lower than was the case in previous decades,” the minutes said.
“Participants generally agreed that it would probably be appropriate to remove policy accommodation gradually,” the minutes said of a subsequent discussion about the near-run rate outlook. “It was noted that beginning the normalization process relatively soon would make it more likely that the policy trajectory after liftoff could be shallow.”
Beyond near-term planning on rates, discussions at the Fed turned to an ominous longer-run outlook. With rates already low and not likely to move up much, the Fed’s target interest rate could return to near zero in the years ahead if the economy is hit by some new shock or recession.
“Some participants noted that it would be prudent to have additional policy tools that could be used in such situations,” the minutes said.