The minutes from the Federal Open Market Committee’s (FOMC) July meeting were more hawkish than expected, according to Standish’s chief economist, Thomas Higgins.
US Fed officials seem in agreement that progress on the labour market has been greater than they had anticipated and that “labour market conditions had moved noticeably closer to those viewed as normal in the longer run”. Indeed, the unemployment rate has declined by a full percentage point over the past year and it was only slightly above the Fed’s year end forecast at 6.2% in July.
Furthermore, based on recent trends, we expect the unemployment rate to reach the upper end of their longer run forecast range of 5.2% to 5.5% during the first half of next year.
However, there is still disagreement on the FOMC about whether the official U-3 unemployment rate is a reliable measure of labour market slack. Many cited elevated levels of long-term unemployment, those working part-time for economic reasons, and the low labour force participation rate as evidence of significant slack. Others countered that the recent drop in the unemployment rate had in fact been associated with progress on reabsorbing the long term unemployed and part time workers.
In any case, ‘many’ participants noted that if convergence toward the Fed’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated. In order to prepare, the Fed continued the discussion of policy normalisation that began at its June meeting. Most agreed the Fed should halt the reinvestment of its securities portfolio sometime after the first increase in the Fed funds rate. There was also agreement that the FOMC should not sell its portfolio of mortgage backed securities.
Looking ahead, the next big question will be when the Fed should remove the language in the policy statement which says: “it will likely be appropriate to maintain the current target for the Federal Funds rate for a considerable time after the asset purchase programme ends”. Philadelphia Fed President Charles Plosser dissented at the July meeting because the language implied the Fed’s decision was time dependent rather than data dependent. Either way, with the Fed expected to end quantitative easing at its October meeting and with most Fed officials believing the appropriate time of policy firming will be sometime around mid-2015, the days of this language appear numbered.
This article was provided by BNY Mellon Investment Management and does not necessarily reflect the views of Citywire