7 Things These Experts Are Saying About The FOMC

In a report published Friday morning, Wunderlich Securities analysts Merrill Ross and Art Hogan discuss the minutes from the January meeting of Federal Open Market Committee.

Here are the highlights detailing their views:

• “After more than six years at the zero bound for the overnight federal funds rate, members of the Federal Open Market Committee (FOMC) fretted over a late liftoff that could lead to an undesirably high rate of inflation.” On the other hand, a premature takeoff could curb what they call a "solid" recovery to date in real activity and labor market conditions “and could increase the possibility that the committee might be forced back to the lower bound by an adverse market reaction.”
• The non-accelerating inflation rate of unemployment (NAIRU) establishes a level of unemployment below which inflation rises, also understood as a “normal” level. The committee’s estimations have been changed recently, to the lower end of the range. In the January 2014 meeting, the range was 5.2 percent to 5.8 percent; in 2015, it narrowed to 5.2 percent -5.5 percent. Some members of the committee noted that “the combination of higher job creation and continued softness in inflationary measures had led them to lower the normal rate of unemployment. Some thought that considerable labor market slack remains, while a few saw only a limited degree of remaining labor underutilization.”
• Several members also observed that “the weakness of nominal wage growth, which had contracted by $0.05 month-over-month in December, might mean that core and headline inflation could take longer to return to 2% than anticipated. However, wages may not have fully adjusted downward, and we might be observing pent-up wage deflation. Consequently, concern was expressed that nominal wage growth might rise rapidly, and inflation could exceed 2% for a time.”
• While the committee is targeting 2 percent core inflation, as measured by Personal Consumption Expenditures as well as the Consumer Price Index, “it monitors market inflation expectations in several ways, including looking at the spread between 10-year Treasurys and Treasury Inflation-Protected Securities (TIPS), which are currently around 1.71% and have been below 2% since September 2014. Some members pointed out that this spread may have tightened because of shifts of funds from abroad into U.S. Treasurys.” However, Wunderlich questions TIPS spread measure’s usefulness.
• At the zero bound, communication is really important for the monetary policy. To avoid misinterpretations and speculation regarding the liftoff, “the committee discussed some possible communications that would underscore the fact that the course of monetary policy remains data dependent, not a function of the calendar.”
• Participants also discussed the considerable flattening of the yield curve, which occurred even in spite of the ameliorating labor markets and U.S. economy. They noted that “the reduction in longer-term rates tended to make financial conditions more accommodative, potentially calling for a somewhat higher path for the fed funds rate going forward. This statement was largely overlooked by market participants, which prefer to be seduced by the cooing of the doves.”
• Wunderlich’s takeaway from analyzing the minutes is that “the committee wants to keep all of its options open. A number of participants said they would need to observe further improvement in labor conditions and continued real economic expansion that could support additional labor market gains before beginning policy normalization, and we did see some data headed in that direction in February. A few months could confirm positive trends, and the committee stands ready to implement policy normalization.”