About three weeks after each Federal Open Market Committee policy meeting, we’re offered a peek at the discussion that led to the Fed’s monetary policy decision. Last week, the FOMC released the minutes from its October gathering and surprised some investors with an idea that can be summarized in one word, symmetric. Before this meeting, most investors knew (see New York Fed President Dudley’s speech in June, for instance) that if inflation, as measured by the PCE Deflator, rose above 2%, then that would be just fine with the Fed. “Just fine” means the FOMC would not be overly aggressive in raising interest rates to combat inflation. Investors pushed out their rate hike expectations in response to the Fed’s “dovish” stance on inflation by buying or holding Treasury bonds. The minutes tell us that the FOMC went one step further by describing inflation below or above its target of 2% by the same amount as “equally costly” – in other words, symmetric. In response, our inboxes were deluged with market participant opinions that the FOMC meeting minutes were “a bit dovish,” even though we already knew what the Fed would do if inflation slightly or briefly crept above 2%: probably nothing. We think the FOMC’s assessment that labor market slack has improved (they considered changing “significant” underutilization to “some” underutilization) is more indicative of their overall view of the domestic economy. If Americans continue to create and find jobs, and if real GDP grows somewhat steadily, the Fed seems ready to raise rates, but likely in a very deliberate and gradual manner. This is especially true if inflation remains in check, which by all measures appears to be the case now and for the foreseeable future.
Sources: Federal Reserve Board, Federal Reserve Bank of New York, WSJ, Goldman Sachs