A few points on the Minutes to the April 28/29 Federal Open Market Committee meeting coming out later today.
First, they are likely to confirm the Committee’s expectations for a less than muscular rebound from the weak first quarter that is not entirely due to the oft-cited “transitory” factors, meaning we expect there will be some anxious discussion over the cautious consumer spending in the wake of the lower gasoline and energy costs and larger than anticipated effects of the strong dollar. The April statement simply acknowledged that “economic growth slowed during the winter months” but refrained from offering a more optimistic take on the coming months that the Committee added to the April statement last year.
Second, we do think the Minutes are likely to nevertheless indicate the Committee confidence that growth through the coming months will still be decent enough and that, in turn, we think will keep the much anticipated rates lift-off in sight for some time later this year. And as we wrote last week (see SGH 5/12/15, “Fed: A Hawkish Lift-off, Dovish Trajectory”), we think the slower pace of activity is likely to be “good enough” for a majority of the Committee to still keep September this year in sight as higher probability for the rates lift-off than waiting until later this year or early next.
And third, the more interesting thrust of the discussions over the near term policy path may accent the trade-off between the timing to the anticipated rates lift-off and the pace of the subsequent rate hikes in what is very likely to be an usually long, shallow tightening trajectory. One of the key aspects of the Committee consensus that will be coming together later this year is weighing the cost/benefit to a rate hike a bit “sooner” than a look at the hard data would suggest and avoiding the risk of “waiting too long” versus seeking greater certainty higher core inflation will follow an uptick in wage growth in the wake of unemployment being pushed through its longer run levels.
Indeed, we think the various scenarios for the most likely rate trajectory may dominate the Minute discussions, and in particular, how cautious the FOMC may need to be during the initial phase of its desired policy normalization to ensure nominal rates do not get too far ahead of the assumed effective real equilibrium interest rate. It is a theme that is likely to dominate the FOMC debate over the next few meetings as they pour over the labor market data as the first hurdle to jump before seriously thinking about the start to policy normalization.