Fomc Minutes Reveal Latest Thinking
The Fed minutes often fail to add clarity beyond what is known from the FOMC statement, but October's minutes revealed some unequivocal information about the Fed's thinking.
By Peter Martin
Thursday, November 19, 2015
The most notable piece of information in yesterday's release pertained directly to the big question of whether lift-off will occur at the next meeting. The minutes said that ‘most participants saw the downside risks arising from economic and financial developments abroad as having diminished’ and that some committee members already felt conditions had been met for normalizing monetary policy, while ‘most participant’ anticipated that ‘these conditions could well be met by the time of the next meeting’. This is the strongest indication yet that the Fed is ready to hike in December and sets the bar fairly low for this to happen — what is clear is that we do not need to see any exceptional strength in the economy between now and the December FOMC meeting for a majority vote amongst the committee member to hike rates; merely supportive data will be enough.
Another interesting aspect of the minutes was a discussion of the concept of an equilibrium real interest rate, a theoretical short-run interest rate that, if applied, would result in full employment and price stability. The Fed projects that this rate will remain lower than levels considered normal in the past and that the gap between the actual level of the federal funds rate and its near-zero lower effective bound would consequently be expected to be narrower on average, thus increasing the occurrence of situations where the Fed would be unable to lower rates enough to prompt a strong recovery in the case of shocks to demand. The minutes note that some official felt ‘it would be prudent to have additional policy tools that could be used in such situation’. Put simply, at least some member of the Fed feel extraordinary stimulus measures might become less extraordinary in the future.
The latest unemployment information looks sound: initial jobless claims fell 5000 last week to 271,000. This is the sample week that will be used in the forthcoming monthly employment situation report and though the number shows improvement from the previous week, it does not compare favorably with the comparable week in October. Nor does the four-week moving average, which rose from 267,750 in the week prior to 270,750 — this is some 7500 higher than it was looking in the sample week in October. Levels below 300,000 are considered healthy for the labor market though, while continuing claims have been trending lower these last few weeks, and overall the data can be characterized as supportive.
The early readings on manufacturing for November have been mixed. We saw the Empire State manufacturing survey come in at a very negative level for a second successive month on Monday, but the Philly Fed showed some slight improvement, today giving its first positive reading for three months. The Philly Fed’s Manufacturing Business Outlook Survey climbed from -4.5 in October to 1.9 this month, though new orders and shipments remained negative. Though more firms reported increases in employment than those reporting decreases, there were overall declines in average working hours. The Kansas City Fed is the next regional manufacturing survey to be released, due on Friday morning.
US stocks were generally lower in early trading on Wall Street, though after Wednesday’s strong gains this may just be a small stint of profit taking. Shortly after the opening bell in New York, the Dow Jones was down 33 points or 0.19% at 17,704, while the S&P 500 Index fell 0.13%. Dow component United Health ($UNH) fell more than 4% after the health insurer slashed its forecast for the year, saying it anticipates substantial losses on its businesses through the Affordable Care Act’s exchanges. This comes as a surprise reversal after the company said last month that it expected ‘strikingly better’ results from its exchange business in 2016 and that it continued to ‘expect exchanges to develop and mature over time into a strong, viable growth market.’
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