We had two, no three, immediate reactions to this afternoon’s Minutes of the Federal Open market Committee January meeting.
*** The first is that everything in the tone and the sense of caution across all important “Policy Planning” discussions points even more starkly to a September meeting first rate hike. Indeed, our sense has been of slippage from June as the base case towards September for the long-awaited rates lift-off has been gathering pace since around the turn of the year (SGH 1/7/15, “Fed: Two out of Three Ain’t Bad”). So for all the recent rhetoric about keeping June on the table as a live option is mostly just that, an option, and increasingly, a low probability one at that. ***
*** At the same time, while we were not at all surprised by the nod towards September, we were frankly expecting a bit more ink on the debate over perhaps tweaking the patience language sooner rather than later to maximize policy flexibility on the lift-off timing. Instead the Committee majority were still much more “inclined to wait” before retooling the patience language, fearful that “financial markets might overreact, resulting in undesirably tight financial conditions” – a taper tantrum redux still dominates their anxieties. ***
*** But overall, in taking a second for the Minutes to sink in what really hit home was how almost all the discussions were built around the planning for a rate hike that is indeed looming on the near horizon, not whether, but when. The staff work cited in the Minutes – Memo to FOMC: why not attach these staff presentations rather than sitting on them for five years if you are so keen on communicating the reaction function – we suspect will shift market attention increasingly away from the lift-off timing to the most likely pace and path of the hikes once underway. ***
Caution on Language Tweaks
We rather thought there was a bit more energy in a search for a new guidance language construction that could be updated more frequently to reflect the continuously changing conditions and data and to maximize the FOMC’s running room on the timing to the rates lift-off, even if being narrowed down into the “mid 2015” window of a first move between the June and September meetings.
Maybe they still will — there is, after all, at least some momentum to do so and it would only take another handsome jobs numbers for it to pick up — but their apparent reluctance to delve more deeply into the debate at the January meeting would suggest an echo of the debates last September and October over a tweak to the “considerable time” phrasing that was equally so loaded with time-contingent meaning.
In the end, it wasn’t worth the risk then in making changes with possible unintended consequences, and the same cautious logic seems to still be in place now Instead it would appear after all these years at the Zero Lower Bound, making language changes for the sake of form rather than content would be like, well, throwing a pass rather than running the ball from inside the one-yard line; it would just be too clever by half.
So for now, what we took from the Minutes is that the FOMC feels on safer ground with a longer runway on the communications front before striking with a first rate hike.
And a Lower NAIRU and a “Nearly Balanced” International
Otherwise, two other points are worth noting, that the longer run unemployment rate was indeed edged down a bit in the Statement for Longer Run Strategy and Monetary Policy to 5.2%-5.5% from the 5.2%-5.8% of the 2014 statement. So the hawkish view is narrowing down towards the dovish arguments there is still enough slack in the labor market even with a 5.7% headline unemployment rate.
We would not be surprised the more up to date and less “formal” quarterly longer run estimates shrink further in the March meeting Summary of Economic Projections, perhaps with more putting a 4 handle on the lower end of the range.
The other was that, as we had anticipated (SGH 1/28/15, “Fed: Way Station to March”), the inclusion in the January statement about keeping an eye on international developments was not a highly dovish signal dropped into the statement that so many took it to be at the time, but was more policy neutral than anything else; while the stronger dollar and global disinflation were certainly on the radar screen, the Minutes also noted that “a number of developments over the intermeeting period had likely reduced the risks to U.S. growth” and that the risks to the US outlook were in fact “nearly balanced.”