Fed Agrees — On Uncertainty

Fed Agrees — On Uncertainty

photo: doug turetsky

Fed minutes from the January 26th & 27th policy meeting released earlier today could be summed up, to a first order approximation, as expressing uncertainty, with a bias to the downside.

To wit, from the Current Conditions and the Economic Outlook:

“Participants discussed whether their current assessments of economic conditions and the medium-term outlook warranted either increasing the target range for the federal funds rate[…] Participants agreed that incoming indicators regarding labor market developments had been encouraging, but also that data releases since the December meeting on spending and production had been disappointing. Furthermore, developments in commodity and financial markets as well as the possibility of a significant weakening of some foreign economies had the potential to further restrain domestic economic activity, partly because the large cumulative declines in energy and other commodity prices could have pronounced adverse effects on some firms and countries that are important producers of such commodities[…] Participants judged that the overall implication of these developments for the outlook for domestic economic activity was unclear, but they agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook.”

For those looking for a dark cloud, it’s worth remarking that the Staff Review of the Financial Situation noted a worsening of domestic financial condition since the last meeting — and began that section by citing factors beyond the control of the Federal Open Market Committee:

“Domestic financial conditions tightened over the inter-meeting period, as turmoil in Chinese financial markets and lower oil prices contributed to concerns about prospects for global economic growth and a pullback from risky assets. The increased reluctance to hold risky assets was associated with a sharp decline in equity prices and a notable widening in risk spreads on corporate bonds. Treasury yields declined across maturities, reflecting a downward revision in the expected path of the federal funds rate and likely some increase in safe-haven demands amid the market turbulence. The dollar appreciated against most foreign currencies.”

On the international markets, the trend was similar but worse:

“Global financial market conditions deteriorated sharply in January, as recent developments in Chinese financial markets and the further decrease in crude oil prices appeared to increase concerns about global economic growth. Equity prices in emerging market economies (EMEs) and in advanced foreign economies (AFEs) fell sharply, and 10-year sovereign yields in the AFEs decreased substantially. Market expectations for the policy rates of major foreign central banks, which had risen somewhat after the December FOMC meeting, ended the period lower. Credit spreads in the EMEs widened. The foreign exchange value of the U.S. dollar appreciated further against most currencies, with larger increases relative to the currencies of commodity-exporting countries.”

In the event of continued weakness in domestic prices, the minutes noted that at least some participants expressed concerns about the inability of the Fed to respond effectively to stimulate inflation.

“Several participants noted that monetary policy was less well positioned to respond effectively to shocks that reduce inflation or real activity than to upside shocks[…]”