Minutes from the Federal Reserve’s monetary policy setting Federal Open Market Committee (FOMC) meeting March 17-18 reveal relatively little new information about the deliberations beyond what was available from the post-meeting statement and press conference (March Meeting). Economic growth appears to have moderated somewhat in the first quarter, the labor market has improved markedly but indicators of underutilization remain, and inflation is expected to remain below target in the near term.
But the minutes did shed some light on the discussion of what signal would provide enough confidence in an improving inflation environment to begin raising interest rates in a still below target environment. The committee agreed no simple indicator would be sufficient but the range of areas was clear: continuing improvement in the labor market, stabilization of energy prices, and a leveling off of the US dollar relative to other currencies. Some meeting participants expected sufficient evidence by June, others expected more time will be required, but the focus has shifted to June or later in the year, rather than when inflation moves significantly closer to target.
The minutes also provide some insight into the committee’s next challenge: communicating the pace of increases following liftoff. Despite the emphasis on rate increases being data driven, that is, tied to the pace of ongoing improvement in economic conditions (faster or slower), and Fed announcements that policy normalization will be gradual, investors consistently underestimate the FOMC participants’ expected interest rate path. Such a disconnect sets the stage for a disruptive adjustment when financial markets find themselves behind the curve on rate increases. Meeting participants agreed additional information conveying the importance of economic conditions to the pace of increases and combatting the notion of set increases at every meeting would be desirable.