I wish I could tell you that “expectations were running high” or that traders were “on the edge of their seats” awaiting the March Fed minutes, but I’m afraid I’d be stretching the truth if I attempted to dramatize the situation.
It’s not entirely clear, to me anyway, that very many people are even at desks this week, let alone squirming there, on tenterhooks, waiting to read the account of a meeting that produced no actual policy changes.
While last month’s proceedings did spark debate about the purported inconsistency between relatively upbeat forecasts and a dot plot that suggested policymakers are still intent on preserving extreme accommodation for years (even if a few “stray” dots betray a fraying consensus), that ostensible disparity was really nothing more than a manifestation of the Fed’s new reaction function. The idea is to sit tight — err, loose — until realized inflation overshoots and an inclusive labor market recovery is well underway.
Of course, there’s plenty of room for interpretation. The Fed has refused to commit to a mathematical formula around AIT and when it comes to labor market inclusivity, there will always be scope to suggest that more work needs to be done.
As I put it several days ago, there’s no chance that the US labor market will be anyone’s idea of egalitarian at any point in the foreseeable future. So, conceivably, the Fed could maintain accommodative policy in virtual perpetuity.
Still, traders were compelled to parse the March minutes for any indication that the recovery and vaccine rollout have sparked tentative discussions around normalization. Ironically, market participants were also wondering if the recent backup in rates had prompted any kind of urgency around the need to deliver more stimulus in the form of WAM extension or some kind of new Operation Twist.
On a quick read — which, I think, is all you need barring some algo catching a word it doesn’t like — there was room for a dovish interpretation. For example, the minutes note that the outcome based forward guidance adopted last year means incessant tweaks aren’t necessary and officials emphasized that forecasts alone are insufficient to prompt a rethink of the current policy stance. “They noted that a benefit of the outcome-based guidance was that it did not need to be recalibrated often in response to incoming data or the evolving outlook,” the minutes said, adding that,
Participants also noted the importance of communicating to the public that the existing guidance, together with the new monetary policy framework as delineated in the revised Statement on Longer-Run Goals and Monetary Policy Strategy, meant that the path of the federal funds rate and the balance sheet depend on actual progress toward reaching the Committee’s maximum-employment and inflation goals. In particular, various participants noted that changes in the path of policy should be based primarily on observed outcomes rather than forecasts.
Jerome Powell was adamant in his post-meeting press conference last month about the need for the data to actually deliver and that realized outcomes (especially on the inflation front) are something wholly different from forecasts. “Talking about inflation is one thing. Getting inflation to overshoot is the real thing,” Powell said last month. “We want to perform. When we’re actually above 2%, we can talk about this.”
The minutes contain references to the economy being nowhere near the Fed’s goals despite recent improvements. “Moreover, participants noted that employment in the leisure and hospitality sector was still down substantially from its pre-pandemic level despite a sharp rebound in February,” the account of the meeting read, noting further that,
Participants generally expected strong job gains to continue over coming months and into the medium term, supported by accommodative fiscal and monetary policies as well as by continued progress on vaccinations, further reopening of sectors most affected by the pandemic, and the associated recovery in economic activity. However, participants noted that the economy was far from achieving the Committee’s broad-based and inclusive goal of maximum employment.
I doubt I need to roll out the charts, but people like pictures, so I’ll oblige. The simple figure (below) shows how far away the labor market is from recovering pre-pandemic levels of employment.
The hole is 8.4 million jobs, even after March’s blockbuster NFP report.
There was seemingly little concern around an inflationary spiral. “Participants observed that headline PCE inflation continued to run below 2%. In the near term, the 12-month change in PCE prices was expected to move above 2% as the low inflation readings from the spring of last year drop out of the calculation,” the minutes said, before continuing,
Most participants also pointed to supply constraints that could contribute to price increases for some goods in coming months as the economy continued to reopen. After the transitory effects of these factors fade, however, participants generally anticipated that annual inflation readings would edge down next year. Subsequently, participants expected that inflation would likely move along a trajectory consistent with achieving the Committee’s objectives over time, supported by strong aggregate demand, which participants expected would be driven in part by accommodative monetary and fiscal policies.
As far as market-based measures go, there was scant evidence of any worry there. “A number of participants indicated that the increases in market-based measures of inflation compensation from the very low levels of last spring were consistent with the view that inflation was likely to move along a path over time consistent with the Committee’s goals,” the minutes read.
After noting that the staff review judged downside economic risks to be “smaller” versus the previous projection, the minutes noted that staff “viewed the risks of upside inflationary pressures as having increased since the previous forecast and now saw the risks to the inflation projection as balanced.” Needless to say, some pundits and market participants wouldn’t use the word “balanced” to describe the risk of an inflation overshoot.
The Fed sounded an optimistic tone on consumption. “Participants anticipated consumer spending would be bolstered by the recently enacted fiscal stimulus packages as well as by accommodative monetary policy,” the minutes said. “Many participants also pointed to the elevated level of household savings and judged that the release of pent-up demand could boost consumption growth further as social distancing waned.” That’s another allusion to what I’ve called the “summer bonanza” scenario.
The following paragraph pretty much captures the gist of the Committee’s position as it stood last month (and clearly still stands today):
Participants noted that it would likely be some time until substantial further progress toward the Committee’s maximum-employment and price-stability goals would be realized and that, consistent with the Committee’s outcome-based guidance, asset purchases would continue at least at the current pace until then. A number of participants highlighted the importance of the Committee clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases.
I’d just reiterate that this has the potential to become maddeningly recursive. That is: You need to preempt the tapering debate by telling the market you plan to have it, but the market will invariably react to that as though you’d already started having the discussion. That then necessitates even more preemptive telegraphing.
Bottom line: There’s nothing that indicates the Fed is anywhere close to seriously discussing tapering QE, let alone normalizing policy in a broader sense. So, carry on.
March minutes
fomcminutes20210317
