US FOMC Minutes digest: concerned about inflation; risk management was behind decision to raise rates
Posted on January 6th, 2016
- Minutes confirmed risk management was key to the decision to increase rates (see US FOMC digest: risk management):
- monetary policy has lags;
- for FOMC members, an 'early' and gradual hike, therefore, reduces the risk "it might need to tighten policy abruptly" later on;
- the asymmetric risks posed by rates still close to zero was dealt with by promising to keep a large balance sheet "until normalization" of interest rates is "well under way."
- FOMC minutes stressed a couple of times the dichotomy between domestic and foreign developments:
- participants took the view that domestic demand would only be partially offset by weakness in net exports, and
- acknowledged downside risks from global and financial developments had receded.
- Inflation outlook was debated at length by FOMC:
- members noted the decline in oil prices "was likely to exert some additional transitory downward pressure on inflation in the near term.
- members also noted that "some survey-based measures" of inflation expectations moved down, and several members expressed unease with that.
- for some members, risks to their inflation forecasts remained considerable (further shocks to oil and commodities; a sustained rise in US dollar).
- a couple worried global disinflationary forces could be more important than improving labor market for the inflation outlook.
- some members said the decision to raise rates was a close call, given uncertainty about inflation dynamics.
- Above mentioned concern with inflation was reflected in the statement saying that the Committee "would carefully monitor actual and expected progress toward its inflation goal."
- However, the hurdle for inflation is not very tough -- underlying PCE momentum is running in the 1.2%-1.5% range, and the Fed central tendency forecasts for 2016 is 1.2%-1.7%.