No surprises in the latest FOMC minutes, but analysts increasingly wonder how the maintenance of unchanged dovish targets squares with sharply higher projections on employment and growth.
FOMC Minutes March 2021
Yesterday, the Federal Reserve released the minutes of its most recent monthly policy meeting. These minutes do not reveal any new decisions, but they do reveal the thinking behind the committee members who vote on and collectively decide U.S. monetary policy.
The minutes did not provide any big surprises, nor did the release of the minutes move the U.S. dollar by any significant amount in its relative value to other currencies. However, the main U.S. stock market index did move in off-hours futures trading to a new all-time high within hours of the release.
The headline takeaway implied from the content of the minutes is that the FOMC members mostly feel that goals of monetary policy remain distant (and here they are primarily talking about the target of 2% inflation and full employment), despite the recent strengthening of the U.S. economy. On top of stronger growth and employment data (last week’s non-farm payrolls data showed that the U.S. added almost 1 million new jobs in March), the U.S. Congress has just passed a $1.9 trillion economic stimulus and will shortly be discussing an even more ambitious infrastructure project. Money supply is extremely loose everywhere you look, GDP growth is running well above 3%, yet U.S. inflation is well below the 2% target at only 1.3% year-on-year.
One interesting nugget came in the suggestion that the 2% inflation target should be an average, so the FOMC would be happy with a period during which U.S. inflation runs above a 2% year on year rate of increase.
Many analysts see a disconnect here and expect that although the FOMC communicates it does not plan to raise rates until 2024, it will be forced to act well before the end of that time frame is reached.
Although the minutes noted that several committee members see the easy monetary conditions as putting the country’s economy in danger, the majority saw threats as evenly balanced and therefore not requiring policy action in any direction.
FOMC Moving Towards Results-Driven Policy?
For me, the most interesting nugget in the minutes revealing that several members stated policy should be based upon actual economic data and not just forecasts. I think this represents a growing unease that the Fed’s projections may not be sufficiently correct to prevent a loss of control if inflationary or recessive pressures blow the lid off monetary policy, so the best course of action will be to take a more empirical approach and follow the hard data.
Although this is not yet the approach of the majority of the FOMC, I believe the FOMC will move in this direction, and may be forced to raise rates sooner than 2024 or even 2023. If markets come to believe this, the greenback is liable to get stronger, so this is a factor to watch for when analyzing any apparent long-term trend in the U.S. dollar which might be worth speculating upon.