Fed January Meeting Minutes Notes

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Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

Participants view

economic expanded at a solid pace

“In their discussion of the economic situation and the outlook, meeting participants regarded the information received over the intermeeting period as indicating that economic activity had been expanding at a solid pace. Although growth likely slowed from the rapid rate recorded for the third quarter of 2014, a variety of indicators suggested that real GDP continued to grow faster than potential GDP late in the year and during January”

Inflation still on track

“Participants generally anticipated that inflation would rise gradually toward the Committee’s 2 percent objective as the labor market improved further and the transitory effects of lower energy prices and other factors dissipated.”

Oil is a net positive, foreign situation poses downside risks, but diminished thanks to central bank actions

“Participants generally regarded the net effect of the recent decline in energy prices as likely to be positive for economic activity and employment. Many participants continued to judge that a deterioration in the foreign economic situation could pose downside risks to the outlook for U.S. economic growth. Several saw those risks as having diminished over the intermeeting period, with lower oil prices and actions of foreign central banks both being supportive of growth abroad, but others pointed to heightened geopolitical and other risks.”

Energy prices underpin consumer spending

“Recent declines in oil prices, which had boosted household purchasing power, were among the factors likely to underpin consumer spending in coming months; other factors cited as supporting household spending included low interest rates, easing credit standards, and continued gains in employment and income.”

Housing sector remained slow though

“However, it was noted that the recovery in the housing sector remained slow and that tepid nominal wage growth, if continued, could become a significant restraining factor for household spending.”

Accomodative policies should help foreign growth, although stronger dollar could be an offset

“In their discussion of the foreign economic outlook, participants noted that a number of developments over the intermeeting period had likely reduced the risks to U.S. growth. Accommodative policy actions announced by a number of foreign central banks had likely strengthened the outlook abroad. The decline in energy prices was also seen as potentially exerting a stronger-than-anticipated positive effect on growth in the domestic economy and abroad. However, the increase in the foreign exchange value of the dollar was expected to be a persistent source of restraint on U.S. net exports, and a few participants pointed to the risk that the dollar could appreciate further”

Need to monitor market expectations of inflation closely

“However, other participants put some weight on the possibility that the decline in inflation compensation reflected a reduction in expected inflation. These participants further argued that the stability of survey-based measures of inflation expectations should not be taken as providing much reassurance; in particular, it was noted that in Japan in the late 1990s and early 2000s, survey-based measures of longer-term inflation expectations had not recorded major declines even as a disinflationary process had become entrenched. In addition, a few participants argued that even if the shift down in inflation compensation reflected lower inflation risk premiums rather than reductions in expected inflation, policymakers might still want to take that decline into account because it could reflect increased concern on the part of investors about adverse outcomes in which low inflation was accompanied by weak economic activity. Participants generally agreed that the behavior of market-based measures of inflation compensation needed to be monitored closely.”

Not really any idea why long term interest rates are falling

“Participants also discussed other aspects of the substantial decline in nominal longer-term interest rates and its implications. The fall had occurred despite the strengthening U.S. economic outlook and market expectations that policy normalization could begin later this year. Some participants suggested that shifts of funds from abroad into U.S. Treasury securities may have put downward pressure on term premiums; the shifts, in turn, may have reflected in part a reaction to declines in foreign sovereign yields in response to actual and anticipated monetary policy actions abroad. A couple of participants noted that the reduction in longer-term real interest rates tended to make U.S. financial conditions more accommodative, potentially calling for a somewhat higher path for the federal funds rate going forward. Others observed that insofar as the shifts reflected concerns about growth prospects abroad or were accompanied by a stronger dollar, the implications for U.S. monetary policy were less clear. It was further noted that investment flows from abroad could also be contributing to the decline in TIPS-based measures of inflation compensation, as such flows tend to be concentrated in nominal Treasury securities rather than inflation-protected securities.”

Some think labor market slack remains, others not

“Some participants believed that considerable labor market slack remained, especially when indicators other than the unemployment rate were taken into account, including the unusually large fraction of the labor force working part time for economic reasons. A few observed that the combination of recent labor market improvements and continued softness in inflation had led them to lower their estimates of the longer-run normal rate of unemployment. However, a few others saw only a limited degree of remaining labor underutilization or anticipated that underutilization would be eliminated relatively soon.”

Interest rates have been low for long enough

“Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time. Some observed that, even with these risks taken into consideration, the federal funds rate may have already been kept at its lower bound for a sufficient length of time, and that it might be appropriate to begin policy firming in the near term. ”

What happens when we drop “patient” from the statement

‘Many participants regarded dropping the “patient” language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates. As a result, some expressed the concern that financial markets might overreact, resulting in undesirably tight financial conditions. “