Minutes from the Federal Reserve’s monetary policy setting Federal Open Market Committee (FOMC) meeting, held December 16-17, indicate the committee is confident the economic recovery will continue with accelerating growth in output, sustained improvement in job gains and a declining unemployment rate.
Lower gas prices as well as improvements in household balance sheets are supporting greater consumer spending. Low interest rates and rising business confidence are supporting business investment. Credit is expanding in both the consumer and business sectors. These sectors are providing a solid base putting economic growth on an upward trajectory and gaining momentum.
The view is optimistic but there are distinct downside risks. Lower gas prices are contributing to the below target inflation rate that the Fed considers a potential threat to more robust economic growth. And while lower gas prices are a net positive for consumers, they are also a potential threat to the booming energy sector. If sustained, the collapse in prices could slow growth in energy producing states.
In addition, to the extent that lower prices reflect not just additional supply from domestic production but lower demand as global economic growth slows the prospects for US economic growth through international trade are diminished.
More generally, concerns about weak or weakening economies, in particular Japan and the Eurozone, are driving an appreciation of the US dollar against foreign currencies that further undermines US economic growth through trade.
Domestically, economic conditions are improving but weakness in conditions abroad could generate a drag on the US economy that we are not well positioned for policy responses to. The current near zero monetary policy and absolute zero fiscal policy environment raises the possibility that outside events may have an outsized impact on the US economy.
The committee remains confident about the recovery, but the timing of the first increase in interest rates remains a question.