“Based on the relatively limited information received since the September FOMC meeting, participants generally agreed that the case for increasing the target range for the federal funds rate had continued to strengthen.”
The minutes from the November meeting of the Federal Open Market Committee (FOMC) reveal a broad consensus around the view that the labor market has improved substantially, growth in economic activity is firming despite some weaknesses, inflation is below but moving toward the 2% target, the risks to the outlook are relatively balanced, and the case for taking the next step in removing monetary accommodation continued to strengthen.
This view is not new and has been gaining support for several meetings. The deliberations have turned from whether conditions are right and the risks of moving prematurely, to whether conditions will be significantly improved upon by waiting and the risks of moving too slowly. The language about the timing of the next increase has gained specificity and some urgency.
The dearth of information between the September and November meetings reduced the probability that this meeting would include compelling evidence to make the case for a rate increase but the December meeting has a better chance.
The desire to make progress on monetary policy normalization has been impeded by a series of unrelated surprises over the course of the year, heightening uncertainty, to which the committee has responded with caution, postponing a rate increase. The surprise between the November and December meetings has been the outcome of the presidential election.
Federal Reserve Chair Janet Yellen in congressional testimony last week stated that proposals for fiscal stimulus in the form of tax cuts and government spending in an environment of already low unemployment would merit a reassessment of appropriate monetary policy, potentially a hint that fanning inflation with both fiscal and monetary policies would lead to undesirably high inflation, and might justify a steeper increase in interest rates to combat that outcome.
Alternatively, the current 50 basis point jump in the yield on 10-year Treasury securities, based on expectations of fiscal stimulus, faster growth and higher inflation, if sustained, may be viewed as an implicit tightening of financial conditions to which the FOMC may choose not to add, and lead to another delay for the federal funds rate. The closer we get the less clear it becomes.