Fed January Meeting Minutes Notes

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. “

Bernanke Press Conference Notes

Quotes from the transcript of yesterday’s press conference

“As I have noted frequently, the economic conditions we have set out as preceding any future rate increase are thresholds, not triggers”

“Thus, the first increases in short-term rates might not occur until the unemployment rate is considerably below 6-1/2 percent”

“Our program of asset purchases was set up a year ago to help achieve a substantial improvement in the outlook for the labor market”

“We could begin later this year. But even if we do that, the subsequent steps will be dependent on continued progress in the economy. So we are tied to the data, we don’t have a fixed calendar schedule, but we do have the same basic framework”

“The criterion for ending the asset purchases program is a substantial improvement in the outlook for the labor market.”

“last month, the decline in unemployment rate came about more than entirely because declining participation, not because of increased jobs. So, what we will be looking at is the overall labor market situation, including the unemployment rate, but including other factors as well. But in particular, there is not any magic number that we are shooting for. We’re looking for overall improvement in the labor market.”

“the large majority of [FOMC members] estimate that the appropriate target of the federal funds rate at the end of 2016 will be around 2 percent even though, at that time, the economy should be close to full employment according to our best projections. The reason for that, there may be possibly several reasons, but we did discuss this in the Committee today. The primary reason for that low value is that we expect that number of factors including the slow recovery of the housing sector, continued fiscal drag, perhaps continued effects from the financial crisis may still prove to be headwinds to the recovery. And even though, we can achieve full employment, doing so will be done by using rates lower than sort of the long-run normal. So in other words, in economics terms, the equilibrium rate, the rate that achieves full employment looks like it will be lower for a time because of these headwinds that will be slowing aggregate demand growth”

“I imagine it would take a few more years after that to get to the 4 percent level. I couldn’t be much more precise in that than we were already obviously stretching the bounds of credibility to talk about specific projections to 2016. But I think, you would expect to see the rates would gradually rise for the two or three years after 2016 and ultimately get to 4 percent”

“it’s important to recognize though that what monetary policy affects is not the potential rate of growth, long run rate of growth, but rather the cyclical part, the deviation of output and employment from its normal level”

“I don’t recall stating that we would do any particular thing in this meeting.”

“We try our best to communicate to markets–we’ll continue to do that–but we can’t let market expectations dictate our policy actions.”

“a factor that did concern us as in our discussion was some upcoming fiscal policy decisions…That being said, you know, again, our ability to offset these shocks is very limited.”

“Well, on the effectiveness of our asset purchases, it’s difficult to get a precise measure.There’s a large academic literature on this subject, and they have a range of results, some suggesting that this is a quite powerful tool, some that it’s less powerful. My own assessment is that it has been effective. If you look at the recovery, you see that some of the strongest sectors, the leading sectors like housing and autos, have an interest sensitive sectors”

“Labor market indicators, while still not where we’d like them to be, are much better today than they were when we began this latest program a year ago. And importantly, as actually is referenced in our FOMC statement, that happened notwithstanding a set of fiscal policies which the CBO said would cost between one and one and a half percentage points of real growth and hundreds of thousands of jobs. So, the fact that we have maintained improvements in the labor market that are as good or better than the previous year, notwithstanding this fiscal drag, is some indication that there is at least a partial offset from monetary policy.”

“I think people don’t fully appreciate that we have two tools: We have asset purchases and we have rate policy and guidance about rates. It’s our view that the latter, the rate policy, is actually the stronger, more reliable tool. And when we get to the point where we can, you know, where we are close enough to full employment, that
rate policy will be sufficient, I think that we will still be able to provide–even if asset purchases have reduced–we will still be able to provide a highly accommodative monetary background that will allow the economy to continue to grow and move towards full employment.”

“we do want to see the effects of higher interest rates on the economy, particularly in mortgage rates on housing”

“there are a number of ways in which the forward guidance could be strengthened. For example, Mr. Craig mentioned the inflation floor. There are other steps that we could take. We could provide more information about what happens after we get the 6.5 percent and those sorts of things, and to the extent that we could provide precise guidance, I think, that would be desirable.”

“our economy is becoming more unequal. The more, very rich people and more people in the lower half who are not doing well, these are–there’s a lot of reasons behind this trend…it’s important to address these trends but the Federal Reserve doesn’t really have the tools to address these long run distributional trends.

“It is true that changes in longer-term interest rates in the United States–but also in other advanced economies–does have some effect on emerging markets…a stronger U.S. economy is one of the most important things that could happen to help the economies of emerging markets”