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FOMC Minutes - Little New Information, Discussion of Neutral Rate in Focus

October 12, 2016

Bottom Line: Minutes of the FOMC's September 20 - 21st meeting further supported the notion that the decision to hold the policy rate steady versus hike 25bps was a "close call", as we knew from the fact that 3 of 10 voters dissented. While generally supporting the idea that a hike on December 14th is a strong probability, the Minutes are mostly old news. It is worth noting that markets don't expect a move when the FOMC meets on November 6th, 6 days before the election -- and there was no warning in these Minutes that the FOMC is seriously contemplating one. Perhaps most interesting in the Minutes was the committee's discussion of the decline in the neutral real rate of interest (" r* ") -- a "number of participants" lowered their longer-term projections for the policy rate based on this idea that productivity and demographic shifts are likely to keep the neutral real rate of interest lower for longer.

Below are the key paragraphs from the Minutes We have highlighted some of the key sentences in these paragraphs.

Among the participants who supported awaiting further evidence of continued progress toward the Committee’s objectives, several stated that the decision at this meeting was a close call.

Participants generally agreed that the case for increasing the target range for the federal funds rate had strengthened in recent months. Many of them, however, expressed the view that recent evidence suggested that some slack remained in the labor market. With inflation continuing to run below the Committee’s 2 percent objective and few signs of increased pressure on wages and prices, most of these participants thought it would be appropriate to await further evidence of continued progress toward the Committee’s statutory objectives. In contrast, some other participants believed that the economy was at or near full employment and inflation was moving toward 2 percent. They maintained that a further delay in raising the target range would unduly increase the risk of the unemployment rate falling markedly below its longer-run normal level, necessitating a more rapid removal of monetary policy accommodation that could shorten the economic expansion. In addition, several participants expressed concern that continuing to delay an increase in the target range implied a further divergence from policy benchmarks based on the Committee’s past behavior or risked eroding its credibility, especially given that recent economic data had largely corroborated the Committee’s economic outlook.

Participants discussed reasons for the apparent fall over recent years in the neutral real rate of interest—or r*— including lower productivity growth, demographic shifts, and an excess of saving around the world. Although several participants indicated that there was uncertainty as to how long the low level of r* would persist, one pointed to a growing consensus that the long period of slow productivity growth and recent evidence that the neutral rate had fallen across countries suggested that r* was likely to remain low for some time. A number of participants noted that they had revised down their estimates of longer-run r* in their contributions to the Summary of Economic Projections for this meeting. Participants discussed the implications of a fall in longer-run r* for monetary policy, including the possibility that policy interest rates might be closer to the effective lower bound more frequently and for a long period, or that monetary policy was ill equipped to address structural factors such as the decline in productivity growth. A couple of participants noted that a lower estimated value for r* over the near term implied that monetary policy was providing less accommodation than previously thought.

Article by Contingent Macro Advisors