A Closer Look At The March Fed Minutes

On Wednesday U.S. stock market indexes moved higher following the release of the minutes from the Fed’s 2 day meeting in mid-March that suggest the majority of Fed committee members remain cautious about raising interest rates in the near term.

Fed members cited risks to the U.S. economy including volatile crude oil prices, the appreciation of the U.S. dollar since mid-2014, and global headwinds.

However, the short term inflation forecast was raised higher based on improvements in oil prices in early 2016.

“The staff’s forecast for inflation over the first half of the year was revised up somewhat, reflecting recent increases in the price of crude oil as well as stronger-than-expected data on core consumer prices early in the year. The staff continued to project that inflation would increase gradually over the next several years, as energy prices and the prices of non-energy imported goods were expected to begin steadily rising later this year. Beyond 2016, the forecast was a bit lower than the previous projection, primarily reflecting a flatter expected path for crude oil prices. As a result, inflation was projected still to be slightly below the Committee’s longer-run objective of 2 percent in 2018.”

Risks “Tilted To The Downside”

Fed members seem less confident and cautious about its March projections for real GDP growth, unemployment, and inflation.

Risks are seen “tilted to the downside” and include caution about “the foreign exchange value of the dollar could rise substantially” according to the Fed minutes.

“The staff viewed the uncertainty around its March projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks; in addition, global economic prospects were still seen as an important downside risk to the forecast. Consistent with the downside risk to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as skewed to the upside. The risks to the projection for inflation were still seen as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged down, and that the foreign exchange value of the dollar could rise substantially, which would put additional downward pressure on inflation.”

Strong U.S. Dollar Since Mid-2014 And Outlook Risks Tied To Global Economic And Financial Developments

Fed Committee members remain cautious about the appreciation of the U.S. dollar since mid-2014, weaker business fixed investment, and “global economic and financial developments as continuing to pose risks to the outlook for economic activity.”

The March Fed minutes state:

“With respect to the outlook for economic activity and the labor market, participants shared the assessment that, with gradual adjustments in the stance of monetary policy, real GDP would continue to increase at a moderate rate over the medium term and labor market indicators would continue to strengthen. Participants observed that strong job gains in recent months had reduced concerns about a possible slowing of progress in the labor market. Many participants, however, anticipated that relative strength in household spending would be partially offset by weakness in net exports associated with lackluster foreign growth and the appreciation of the dollar since mid-2014.

In addition, business fixed investment seemed likely to remain sluggish. Furthermore, participants generally saw global economic and financial developments as continuing to pose risks to the outlook for economic activity and the labor market in the United States. In particular, several participants expressed the view that the underlying factors abroad that led to a sharp, though temporary, deterioration in global financial conditions earlier this year had not been fully resolved and thus posed ongoing downside risks. Several participants also noted the possibility that economic activity or labor market conditions could turn out to be stronger than anticipated. For example, strong expansion of household demand could result in rapid employment growth and overly tight resource utilization, particularly if productivity gains remained sluggish.”


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