The minutes from the Federal Open Market Committee (FOMC) meetings, released three weeks after the meeting as standard practice, offer a glimpse behind the curtain, providing details of the deliberations, areas of agreement as well as ongoing debate, and specific articulations of viewpoints from unnamed meeting participants, going beyond the statement released immediately following the meeting.
Minutes from the January 31-February 1 meeting revealed broad consensus on the relative strength of the economy and labor market, and the rough balance between upside and downside risks to the outlook. There was also broad consensus regarding the considerable uncertainty surrounding changes to fiscal and other government policies, and the likely impact and timing on the economy.
The possibility that more expansionary fiscal policy could lead to an undershooting of the longer-term unemployment rate target and overshooting of the 2% inflation target was a more contentious issue. Some participants expressed concerns about falling behind the inflation curve, while others viewed current low levels of inflation and inflation expectations as evidence of residual slack in resource markets, which would allow time for further consideration.
Further appreciation of the US dollar and its attendant impact on economies, both foreign and domestic, was viewed as posing downside risk, through depressing the domestic export sector and the potential for exacerbating financial vulnerabilities overseas. Addressing downside risk developments has been argued as a particular concern, given the already low federal funds rate and the constraint it puts on policy response options in the event the economy needs further stimulus.
So in consideration of the areas of agreement and the areas of ongoing debate, the committee decided to keep the target range for the federal funds rate at its current 50-75 basis point range for the time being. Although there was wide support for another increase in the funds rate “fairly soon” if economic conditions continued to unfold as anticipated.
As an implication of the heightened uncertainty surrounding the near term outlook, the committee discussed the need to adjust its communication to reflect the appropriate path of monetary policy in response to the realization of either upside or downside risks. Realization of upside risks may motivate a steeper trajectory for the funds rate than currently expected; realization of downside risks may motivate a flatter path than currently expected.
It is highly uncertain whether economic conditions will change slightly or significantly, for the better or worse, or not at all, in response to anticipated government policies that may or may not happen. But it is clear that whatever the outcome, and the implications for the trajectory of the federal funds rate, policymakers at the Federal Reserve are determined to let us know. Expect an acceleration in the pace of rate increases, telegraphed by FOMC meeting communications.