The minutes of the October FOMC meeting confirm that the rates’ liftoff is at hand, while indicating that the upward cycle will be gradual, with a low point of arrival….
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Most of the implications of the minutes were already known from the statement, the evolution of data, and the numerous Fed speeches of the past few weeks. However, the minutes are informative on two important points. 1) The distribution of opinions on the outlook and the risks: based on the minutes, the rates’ liftoff may be implemented despite one or more dissenting opinions. 2) The rates endpoint will be revised further down: the debate on the equilibrium real interest rate confirms an estimate of around zero for the short term, and signals that non-conventional monetary policy tools may be needed again in the future.
The minutes report widespread optimism on growth, driven by “solid” consumption and investment, despite headwinds from weak exports and lower inventories. Participants noted the slowdown in employment growth, but remained positive on the developments of labour market conditions (later confirmed by the October Employment Report). In general, there was consensus on the reduction of slack, while opinions differed on the size still existing in the economy, with a prevalence of those who considered the adjustment as “significant”. On inflation, FOMC participants noted that the core PCE inflation stayed below 2%, while pointing out that several other inflation measures remain at higher levels, and have showed signs of a strengthening. There was consensus on the fact that the drag represented by energy prices and the dollar should be transitory. “Several” participants noted downside risks deriving from market-based inflation compensation, although “participants generally” expected inflation to rise towards 2%, in step with the reduction of underutilised resources. “Most participants” believed that downside risks from international developments have decreased, although “a few” still considered them to be “significant”.
During the meeting, a long discussion revolved around equilibrium real rates, a key point in 1) assessing the monetary policy stance, and 2) determining the end-point of the rate path. The staff estimates the short-term equilibrium real rate of interest at around zero, in line with the estimates of the San Francisco Fed. This implies, with reference to point 1), that monetary policy is not extraordinarily accommodative. For what concerns the long-term equilibrium rate, and point 2), a tendency towards lower levels is confirmed, while stressing the uncertainty lingering over the adequacy of the short-term real rate as a guide for monetary policy. During the discussion, “several” participants indicated that the short-term equilibrium real rate should rise back gradually, while staying below the levels prevailing in previous cycles.
For what concerns monetary policy strategy, there was broad consensus on a likely hike in December: “some” participants considered the necessary conditions for a hike to have been met already in October, and “most participants” expected that “these conditions could well be met by the time of the next meeting”, while stressing that the decision remains datadependent. However, there are some dissenters: “some others” judged it unlikely that the information available by the December meeting would warrant a reversal in 2015. Potential dissenters emerge in various parts of the minutes, not only in the discussion on rates, but also when debating inflation, risks from abroad, and the labour market: in the various sections, the opinions are attributed to “some”, “a couple”, “a few”, signalling that at the December vote, probable dissenter Evans could be joined by least one, if not two, other Board members (Brainard and Tarullo). Great caution emerges in any case from the overall distribution of opinions regarding the likely path of interest rates.
In conclusion, the minutes confirm broad consensus in favour of a likely rate hike in December, with some potential dissenters. The discussion on equilibrium real rates signals new downside revisions of the rates end-point, and a very gradual removal of stimulus. The message conveyed by the minutes is dovish on the whole, positive on the economy and very moderate on future interest rate hikes.
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