FOMC’s May meeting minutes indicate rate hike “soon”

The FOMC’s May meeting minutes released today indicated continued confidence in the U.S. labor market recovery and implied that the Committee is comfortable to continue its path of gradual rises in the federal funds rate.

The minutes stated that “most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the Committee to take another step in removing some policy accommodation”.

The possible weakness in economic growth and consumer spending early in the year was noted; however, the general sense was that it would be transitory. Subdued consumer spending was in contrast with the rebound seen in both residential and non-residential investment that were seen as an encouraging sign.

The risk assessment of the FOMC stayed balanced, with slight alteration to the longer-term outlook. But participants noted financial stability concerns about valuations in CRE and that “reforms in the housing finance sector might have implications for such valuations.”

The discussion continued around the two sides of the Fed’s mandate, with doves highlighting inflation’s current low readings and showing concern regarding expectations, while more hawkish members noted the undershooting of the jobless rate and the potential for this to lead to an eventual overshooting of inflation, noted TD Economics.

The minutes gave some more detail on reinvestment policy, implying that it would soon formally outline its policy and possibly start contracting its balance sheet later in 2017. The outlined approach would set dollar limits on the amount of securities that would be permitted to run off. The rate of runoff would be small in the beginning; however, it would rise over time. Limits might be raised every three months until fully phased-in, at which point they would be kept until the U.S. Fed’s balance sheet was normalized.

As long as the U.S. labor market keeps on generating above-trend job growth, the central bank’s bias would be gradually to hike the federal funds rate. Only a continued slowdown in inflation might slow their hand. Current softness in price growth might underpin those on the FOMC who see the jobless rate as either under-reporting the level of economic slack or as not having explanatory power in forecasting inflation that it once did, stated TD Economics.