By Robert Eisenbeis, Ph.D.
On Wednesday, the Fed released the minutes of the FOMC's December meeting. As usual, the minutes followed the standard format, mirroring the way presentations and discussions proceed at FOMC meetings. It began with a brief summary report by the manager of the Open Market Desk in New York. There were only two notable pieces of information in that summary. The first was that market participants attributed the narrowing of spreads between short- and long-term securities to the anticipated continuing rise in the FOMC's target federal funds rate and the belief that the Treasury would increasingly concentrate its issuance of new securities to the short end of the curve. This would push up short-term rates while increasing upward pressure on longer-term securities' prices and decreasing longer-term rates. The second piece of information was simply the confirmation that the reinvestment operations are proceeding on course, but there was no information provided on what changes have taken place in either the size of the portfolio or its composition.
The minutes then continued with separate discussions of staff summaries of real-economy and financial-market conditions leading up to the December meeting. Again, these separate summaries reflect the organizational structure of the Board, whose Division of Research and Statistics focuses mainly on the real economy, while its Division of Monetary Affairs concentrates on financial markets. These discussions were then followed, as is customary, by a summary of the "Staff Economic Outlook," which this time was quite brief. The main change noted from the previous meeting was the staff's upward revision of real GDP growth for 2018 as the result of a reassessment of the likely impact of the new tax legislation. Otherwise, aside from a slight uptick in the inflation forecast and a continuation of the decline in the unemployment rate, the staff viewed the risks to the forecasts as relatively balanced and the uncertainties surrounding the forecasts as similar to what they have been over the past 20 years.
The minutes then turned to the discussion of participants' views on current conditions and their outlook, which is where the real meat of the minutes begins. One can skip everything that precedes this discussion and get to the heart of what actually happened substantively at an FOMC meeting. After a boilerplate description of the "Summary of Economic Projections," the discussion turned to how the participants viewed the economy. Similar to what the staff saw, participants viewed growth as solid. The hurricane disruptions were seen as minor in terms of their impact on overall activity. Labor market growth was viewed as consistent with above-trend growth of GDP over the previous two quarters. Inflation was expected to remain below the 2% target, and near-term risks were balanced. All these assessments were consistent with what the Board staff had provided and were viewed as likely to continue assuming a continuation of the gradual adjustment in policy.
After presenting the summary conclusions, the minutes then began to highlight some of the issues and differences in views of participants. With respect to the tax legislation, which was passed by Congress subsequent to the meeting, a few expressed the view that anticipation of the tax changes was already having an impact on consumer spending, while others voiced considerable uncertainty about the likely impacts on spending. Similar views were also reflected in participants' uncertainties about the impacts of the tax changes on business investment spending.
With respect to the labor market, participants saw continued stretching in labor demand, but few cited any evidence of a pickup in wages, except for scattered increases in wages of unskilled workers. To some this meant that there was opportunity for even further gains in employment. Their emphasis on labor markets and wages reflected not only the committee's dual mandate but also the view that wage increases have a causal effect on prices. In other words, the Phillips curve framework still seems alive and well, at least as far as some participants are concerned. The discussion of inflation in the minutes also mirrored much of the recent public discussion by Chair Yellen, who acknowledged the difficulties the committee has in understanding current inflation dynamics and why inflation continues to remain below target, despite very accommodative policies. Among the possible explanations cited were transitory factors, secular trends in globalization and technology, and a decline in inflation expectations.
The minutes also reflected participants' concerns for the impacts that accommodative policies are having on financial markets, including low rates, easy terms for risky borrowers, elevated asset values, and low volatility. Particularly noteworthy were the low term premiums on longer-term assets that are due in part to previous purchases of assets by central banks, low inflation, and high demand for longer-term assets. Concern was expressed that the lower term premiums, while not of current concern based on historical experience, are still worth careful monitoring as a harbinger of a potential inversion that signals a future downturn, posing a risk to financial stability.
When it came to the policy implications of their assessment of current and future economic conditions, all but two participants seemed comfortable with not only a tightening at the present meeting but also with the gradual path for tightening that they saw going forward. Of course, some members felt that developments, especially a jump in inflation, might be grounds for a steeper policy path, while others argued that they were uncomfortable with the number of rate hikes implied by their forecasts for 2018, given the persistence of inflation below target. The discussion concluded with the obligatory recognition that future policy moves will depend upon how the economy evolves in coming months.
Noteworthy at the conclusion of the minutes were the explanations for the dissents to the majority decision to raise rates by Presidents Evans and Kashkari. President Evans argued that a pause is in order in view of the persistence of inflation below target and that such a pause would better support an increase in market inflation expectations. President Kaskari was also concerned about the failure of inflation to move towards target and about the flattening of the yield curve, which he believes contributes to falling longer-term inflation expectations and suggests a lower neutral rate for policy. President Kaskari dissented in every meeting when the policy rate was raised this year, while President Evans voted with the majority in June but chose to dissent in December. Both of these presidents will be replaced as voting members this year by presidents who are much more inclined to favor the current policy path.
 There was only one short paragraph suggesting input from the Division of International Finance and no indication this time of material attributable to the Division of Financial Stability. That is not to say that there weren't presentations by staff of those divisions.
 Use of the term members in the minutes refers to the Board of Governors and the five voting members of the FOMC while participants refers to the Governors and all the reserve bank presidents.