The minutes of the late-September, Federal Open Market Committee (FOMC) meeting, released Wednesday after a three-week lag, showed Federal Reserve policymakers in the throes of uncertainty about the US's economic outlook amid a robust economy, growing labor shortages and trade tensions. What was not uncertain in the minutes is that the Fed will continue on its path of gradual rate hikes with one more this year and perhaps three in 2019, as the central bank hunts for that elusive neutral rate that neither stimulates nor restricts growth.
Some members of the FOMC, in fact, think it would be desirable to overshoot that neutral rate, in order to get into restrictive territory to head off any inflationary pressures from an overheated economy. Absent from the minutes, however, was any mention of 'he who shall not be named'—President Donald Trump, who has repeatedly criticized Fed policy and called them crazy, and "my biggest threat," for endangering the economy’s strong growth.
Regional bank presidents were dealing with this ambivalence in their contacts with local business, the Fed minutes showed.
“A number of contacts cited factors that were causing them to forego production or investment opportunities in some cases, including labor shortages and uncertainty regarding trade policy.”
And they continued:
“In particular, tariffs on aluminum and steel were cited as reducing new investment in the energy sector. Contacts also suggested that firms were attempting to diversify the set of countries with which they trade — both imports and exports — as a result of uncertainty over tariff policy.”
The fierce attacks from the president present a dilemma for FOMC members. Whatever merit there is in his claims that a premature tightening of monetary policy will tamp down the economy, they can hardly debate the issue without appearing to be caving in to his demands. This would seriously undermine the Fed’s credibility going forward.
Not for the first time, the president’s tweeting seems to be counterproductive in terms of what he wants to achieve.
The other tangle for FOMC members is the difficulty in determining this putative neutral rate. The panel dropped the word “accommodative” from the September consensus statement precisely because it gave a false sense of precision about where this rate lies. All the policymakers know for sure is that they are getting closer to this rate with very quarter-point hike.
As well, as mentioned above, several members feel it might be necessary to surpass the neutral rate in order to forestall any burst of inflation. “A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level,” is what the minutes drily recorded in their carefully calibrated code for the weight to give these considerations.
The dot-plot graph for interest-rate expectations shows the overnight federal funds rate going into the 3% and above territory in 2019 and 2020, compared to 3% and below for longer-run forecasts. In fact, the committee seemed to be losing patience with pinpointing this neutral rate.
Rather, the minutes suggest, policymakers are tending to simply evaluate incoming data on the economy at face value. “In this context, estimates of the level of the neutral federal funds rate would be only one among many factors that the committee would consider in making its policy decisions,” the minutes said.
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