Three dissents, all preferring an increase in the federal funds rate at the September meeting, focused on the same core argument: the current level of the unemployment rate signals a tight labor market that will persist for several years, push inflation closer to target and risks overshooting if monetary policy normalization is delayed too long. The overshooting could require a faster pace of interest rate increases that could endanger the expansion, as well as the committee’s credibility.
The minutes from the September meeting of the Federal Open Market Committee (FOMC) detail wide agreement among committee members with respect to confidence in the economic outlook, the balance of risks, and the implications for the stance of monetary policy. The question separating members from the consensus is whether the unemployment rate accurately reflects the amount of slack in the labor market and the relevance of historical experience given current conditions.
The argument for an increase: “A number of participants noted that they expected the unemployment rate to run somewhat below its longer-run normal rate and saw a firming of monetary policy over the next few years as likely to be appropriate. A few participants referred to historical episodes when the unemployment rate appeared to have fallen well below its estimated longer-run normal level. They observed that monetary tightening in those episodes typically had been followed by recession and a large increase in the unemployment rate.”
The argument against: “Some others judged this historical experience to be of limited applicability in the present environment because the economy was growing only modestly above trend, inflation was below the Committee’s 2 percent objective, and inflation expectations were low—circumstances that differed markedly from those earlier episodes. Moreover, the increase in labor force participation over the past year suggested that there could be greater scope for economic growth without putting undue pressure on labor markets; it was also noted that the longer-run normal rate of unemployment could be lower than previously thought, with a similar implication.”
The compromise: “It was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation.
Several members judged that it would be appropriate to increase the target range for the federal funds rate relatively soon if economic developments unfolded about as the Committee expected; they saw the new sentence in the third paragraph of the Committee’s statement—a sentence indicating that the case for an increase in the federal funds rate had strengthened but that the Committee had decided, for the time being, to wait for further evidence of continued progress toward its objectives—as reflecting this view.”
Expect a December increase.