The minutes from the July meeting of the Federal Reserve’s monetary policy setting arm, the Federal Open Market Committee (FOMC), provide some detail on the most recent round of deliberations addressing the question: Is the economic recovery strong enough to begin the process of monetary policy normalization?
The committee members were in agreement that much progress has been made over the course of the recovery with respect to growth in economic activity and improvement in the labor market, but confidence that inflation would reach the 2.0% target over the medium term still divides them.
Most members agreed that we’re not there yet, but we’re getting close. The remainder held the view that we’re there, or we will be shortly. Among the concerns of the doubters: that despite accumulated improvement in the labor market, more is required; confidence in inflation moving up is predicated on expectations of output growth and labor market improvement that need to be substantiated; inflation may not respond to diminishing labor market underutilization as expected; current policy provides little maneuvering room in response to downside shocks, international or domestic, heightening the risk associated with premature tightening.
Among those in favor of liftoff, views included: even with liftoff, the low level of the federal funds rate combined with the size of the Federal Reserve balance sheet keep the monetary policy stance sufficiently accommodative; risks of future undesirably high inflation or to financial stability; that accumulated progress should be weighed more heavily than monthly changes in incoming data.
Despite these differences, the minutes reveal that there is more agreement than disagreement on the timing of liftoff. The differing views can be characterized as: there, almost there, and soon.
But another point made clear in the minutes is that despite the public attention paid to the timing of the first increase in the federal funds rate, the subsequent pace of increases will have a greater impact on the progress of economic recovery than when normalization begins. And on this point there is no disagreement, the pace will be slow.