Takeaways from the minutes to the March 18-19 FOMC meeting

Our brief thoughts on the FOMC minutes:

1) When Janet Yellen said at the FOMC presser that the public, in thinking about the future path of short rates, should mind the FOMC statement rather than the dots in the Summary of Economic Projections, she was simply reaffirming what had already been discussed during the meeting. What the minutes don’t explain very well is just why “the increase in the median projection overstated the shift in the projections”. In any case, the point remains that Yellen would rather the dots be considered a secondary communications tool.

2) The minutes revealed the large amount of extant disagreement and confusion about the the amount of labour market slack, mirroring the same debate that continues to be had by economics commentators and bloggers.

3) To the extent that the centre of gravity within the FOMC has been shifting (from belief in more labour market slack towards belief in less, and from a preference for later rate rises towards sooner), the minutes and a recent speech also suggest that Yellen herself hasn’t followed the shift. And this is, after all, her committee.

4) The rationale behind getting rid of the unemployment and inflation thresholds is understandable, but is it possible that the change came prematurely — especially since the thresholds were replaced only by additional qualitative language rather than by new quantitative markers? The explanation for the change is that the unemployment rate would likely fall to 6.5 per cent “before long”. That could be true, but we’ve just had two consecutive employment situation reports in which rate has been 6.7 per cent, and (knock on wood) in which labour force participation rate appears to climbing or at least stabilising.

5) Yes, the minutes do confirm that initial hawkish interpretations of the March meeting were wrong. But they also underscore why, absent a broader policy regime change, the Fed’s communications could remain difficult for markets to interpret for a while. The minutes include the line that “most participants felt that quantitative thresholds, triggers, or floors should not be a part of future statement language, with a number of participants noting the uncertainty associated with defining and measuring the unemployment rate and the level of employment that would be most consistent with the Committee’s maximum employment objective, or other similar concepts”. But it’s hard to believe that the uncertainty associated with qualitative language and a wider range of indicators will be less than with numerical markers. The reaction function will stay murky.

6) The committee continues not to see urgency in defending the inflation target from below, with “most” participants expecting inflation to return to 2 per cent “over the next few years”.