FOMC Minutes Preview: The risks behind the pause

• FOMC voted to raise the Fed Funds rate 0.25% at the December 18-19 meeting to a 2.50% upper target
• The 'Projection Materials' reduced the estimated 2019 end rate from 3.1% to 2.9%  implying two increases in 2019 rather than the prior three
• US economic growth was reduced to 3.0% in 2018 from 3.1% and to 2.3% in 2019 from 2.5%

 

Analysis

The explanations for the change in the Fed’s economic and rate outlook was not contained in the FOMC statement at the December meeting. Its description of the US economy was little changed from the September 26^th meeting when the bank issued its previous set of projections.

“Economic activity has been rising at a strong rate” in both statements. “Job gains were strong” and the “unemployment rate has stayed low” in September and “remained low” in December. The only difference was in the characterization of “business fixed investment” which grew “strongly” in September and “moderated from its rapid pace earlier in the year” three months later.

Chairman Powell provided some context in his prepared statement before the news conference following the FOMC announcement. “Despite this robust economic backdrop and our expectation for healthy growth, we have seen developments that may signal some softening relative to what we were expecting a few months ago. Growth in other economies around the world has moderated somewhat over the course of 2018, albeit to still-solid level.”

He continued, “In our view, these developments have not fundamentally altered the outlook. Most FOMC participants have, instead, modestly lowered their growth and inflation forecasts for next year.” 

Although the Chairman maintained that the bank had not altered its underlying view of the American economy, this was the first time in over two years that the bank had lowered its forecasts rather than raising them.

And further in the remarks he said “There are two important differences in the policy outlook today versus next year. In early 2018, we saw a rising trajectory for growth; today, instead, we see growth moderating ahead.”

FOMC Minutes

The Fed minutes are an edited version of the FOMC discussions. They are accurate and they are also part of the policy narrative that the Fed presents to markets and the world.

The extent of that moderation in global growth, its sources and details are the key interests of the minutes. Are the concerns of the Fed governors about the various global political and economic challenges specific, are they ranked? The vote to raise rates was unanimous. Are the concerns also?  If not are they widespread?   What part did the gyrations and decline of the equity markets play in the Fed deliberations?

Chairman Powell no doubt did a good job of representing the deliberations and views of the FOMC in his prepared remarks and the answers that followed. But when it comes to the decisions and considerations of the Federal Reserve governors on rate policy there is no such thing as too much information.