The FOMC minutes are designed to provide a concise summary of the presentations and discussions that take place at FOMC meetings and the context behind the terse press release provided at the end of each meeting. Presumably, this communication device is meant to provide added color and a sense of where policy may be going. But has it? Consider the following:
The Wall Street Journal front-page headline of May 24 states “Fed Signals June Rate Rise,” but the only evidence provided is this quote from the minutes: “It would likely soon be appropriate for the Committee to take another step.” While soon may rhyme with June, the statement in no way justifies the Journal’s headline. The minutes made no mention of a rate hike in June.
Then there was the headline from Marley Jay, Associated Press: “Fed Gives Stocks a Boost…” with this first line of the story: “U.S. stocks turned higher Wednesday after the Federal Reserve indicated it’s not in a hurry to raise interest rates too quickly.” The story went on to conclude that the FOMC would be on a gradual path of raising rates and might even tolerate inflation’s rising above 2% for a brief period. However, there is scant evidence in the minutes for this conclusion. The only mention of the possibility of inflation’s being above 2% was the statement that “Some participants suggested that inflation was likely to moderately overshoot 2 percent for a time.” But the minutes go on to note that “… several participants suggested that the underlying trend in inflation had changed little, noting that some of the recent increase in inflation may have represented transitory price changes in some categories of health care and financial services, or that various measures of underlying inflation, such as the 12-month trimmed mean PCE inflation rate from the Federal Reserve Bank of Dallas, remained relatively stable at levels below 2 percent.” It is important to note here that the words some and several have quantitative meaning when used in the minutes to describe how many FOMC participants are being referenced. Some means 3 or 4 while several means more than half.[1] So only 3 or 4 participants thought that inflation might drift above the target, but this was certainly not the majority view, nor do the minutes provide any indication of the Committee’s willingness to tolerate inflation above its target of 2% should that event occur.
Finally, Deutsche Bank, in its research commentary, continues to expect three more rate hikes in 2018, based upon the assessment that labor markets are tightening more and that there is now a greater likelihood that the FOMC will overshoot its inflation target.[2] However, this view is counter to what the FOMC suggests in its minutes, for several reasons. The quotes above certainly don’t suggest that a majority of the FOMC see significant inflation risks to the upside. Nor does the majority see overshooting as a problem yet. Furthermore, recent increases in healthcare and financial services were viewed as being transitory. The tight labor markets were not seen by “many” as an immediate problem: “Many participants commented that overall wage pressures were still moderate or were strong only in industries and occupations experiencing very tight labor supply; several of them noted that recent wage developments provided little evidence of general overheating in the labor market.” So even to those who believe in the Phillips curve, the inflation pressures from labor markets are not viewed by the FOMC as a pressing risk. The word many here is meaningful, since in Fedspeak it suggests that well more than half of the participants held the view.
All of this reading of the tea leaves, often leads to conflicting interpretations of the minutes and suggests that there is still much work to do on the FOMC’s part with respect to its communications policies overall and with the minutes in particular. While there are people, both inside and outside the Fed that are against some of the FOMC’s disclosure policies, such as releasing the dot charts, the bigger problem is that there are multiple constituents for information and not all have the same needs. For example, the current SEP forecasts are not granular enough, in that markets care more about the short term and what the likely policy path for rates looks like quarter by quarter and not simply yearly. Too much guessing is inspired by the present yearly forecasts. The reluctance to provide more granularity is understandable, especially when the projected paths may not be realized and there is the real risk of being wrong? But more granularity would also serve to better inform expectations and perhaps anchor expectations in a more reasoned way. It is easy to criticize forecasters, but one also needs to consider the Fed’s problem. The Fed is tasked with steering a battleship while looking in the rear view mirror. It is no wonder that the FOMC remains cautious and uses words like patient and data-dependent.
Robert Eisenbeis, PH.D.
Vice Chairman & Chief Monetary Economist
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