Two things, well, make it three things, stood out for us in reading through this afternoon’s Minutes to the September meeting of the Federal Open Market Committee.
The first was the high probabilities of a December rate hike being signaled in the key messaging sentence, noting without nuance, that “many participants thought that another increase in the target range later this year was likely to be warranted if the medium-term outlook remained broadly unchanged.”
*** And indeed, so we don’t bury the lede, we still believe a rate hike in December is highly likely (SGH 9/18/17, “Fed: September Signals”). The concerns over the inflation dynamics is a profoundly serious, defining issue to the Fed’s current policy debate, but the burden of proof will still fall heavily on the Committee members arguing for a pass on that third rate hike this year. ***
Along the same line of thought, we would also note that several of the more dovish members worried over the dangers in the persistence of low inflation have already hedged a bit in their public remarks since the meeting and after Chair Janet Yellen’s forceful speech in Cleveland, noting they are “open” to a hike even if they caution for clearer, firmer evidence of rising inflation.
Financial Stability and Cost/Benefit Trade-offs
A second point from the Minutes that caught our eye was the explicit mention of financial stability risks in the hawkish case laid out for continued rates normalization. Going too slow in the gradual removal of monetary accommodation could prove “costly to reverse or could lead to an intensification of financial stability risks or to other imbalances that might prove difficult to unwind.”
There has been a rising drumbeat of caution on this front for several months now by several Fed officials, including Chair Yellen herself, who finally slipped in a reference to financial stability risks in her Cleveland speech the week after the September meeting. It has been a theme we have been highlighting, even if we were a bit premature prior to Jackson Hole (see SGH 8/23/17, “Fed: Financial Stability”).
But we do think the concern over financial stability risks will be an increasingly frequent theme among a good number of Fed officials in the coming weeks in the run up to the December meeting, including Chair Yellen to a degree, as well as Board Governor Jay Powell, in addition to District presidents like Kansas City’s Esther George or Boston’s Eric Rosengren.
And the third takeaway for us in the Minutes was the repeat on several occasions of the risk management trade-off seen by a hawkish-leaning majority. As we noted as a preview of Chair Yellen’s Cleveland speech (SGH 9/25/17, “Fed: Framing the Inflation Debate”), an important cornerstone to the steady, gradual rates normalization is the higher potential costs in reversing the damage of faster, higher than expected inflation or financial instability if the Fed takes too long in getting rates to or near neutral by waiting until inflation is clearly moving higher in the data.
Indeed, in the end, the December decision will be based on the inflation forecast, not the most recent data, and unless inflation expectations are clearly falling, the burden of proof going into the December meeting will be on those Committee members arguing against a year-end rate hike to bring the target range for fed funds to 1.25%-1.5%.
Many versus Most
We would be remiss, however, not to note there was a liberal dose of dovishness laced throughout the account of the September meeting, especially in the discussion over inflation dynamics that, to her credit, Chair Yellen gave considerable air time to in both the post-meeting presser and in her Cleveland speech the following week.
And in fact It was interesting that the Committee majority was described only as “many” rather than, say, “most” or some other phrasing, which would suggest the hawkish lean inside the committee is not quite as solid or deep as assumed.
On the other hand, the doubtful doves — whom we reckon number five among the 17 FOMC members — only managed to warrant a reference to “a few” or “several,” which is not very impressive. So perhaps there is a middle handful of Committee participants who are on the proverbial fence?
In any case, one last sign of the FOMC’s hawkish leanings can be gleaned from the way the differing views on inflation dynamics were duly described: Mrs. Hackney in our Rhetoric 101 class in High School always taught to leave the reader with the impression you want by listing it last, and sure enough, the hawkish arguments always came at the end of those dreadfully long Fed paragraphs.