https://www.federalreserve.gov/monetarypolicy/files/fomcminu…
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in June indicated that the labor market had continued to strengthen and that economic activity had been rising moderately so far this year. Job gains had been solid, on average, since the beginning of the year, and the unemployment rate had declined. Household spending and business fixed investment had continued to expand.
On a 12-month basis, overall inflation and the measure excluding food and energy prices had declined and were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, and labor market conditions would strengthen somewhat further. Inflation on a 12-month basis was expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Members saw the near-term risks to the economic outlook as roughly balanced, but, in light of their concern about the recent slowing in inflation, they agreed to continue to monitor inflation developments closely.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members decided to maintain the target range for the federal funds rate at 1 to 11/4 percent. They noted that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessment of realized and expected economic conditions relative to the Committee’s objectives of maximum employment and 2 percent inflation. They expected that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate, and that the federal funds rate was likely to remain, for some time, below levels that are expected to prevail in the longer run. They also again stated that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data. In particular, they reaffirmed that they would carefully monitor actual and expected inflation developments relative to the Committee’s symmetric inflation goal. Some members stressed the importance of underscoring the Committee’s commitment to its inflation objective. These members emphasized that, in considering the timing of further adjustments in the federal funds rate, they would be evaluating incoming information to assess the likelihood that recent low readings on inflation were transitory and that inflation was again on a trajectory consistent with achieving the Committee’s 2 percent objective over the medium term.
These are the minutes from their meeting held on July 25-26. Inflation remains below their 2% target. As I’ve said before, I believe that the technology advancements are accelerating and contributing to keeping inflation at bay. In fact, it could be that monetary policy (interest rate cuts and QE) since the financial crisis not only saved the global economy from a depression but perhaps that policy also saved us from deflation. The Fed and market “experts” have talked about gradually raising the Fed Funds Rate and reducing the Fed’s balance sheet (by starting to reverse QE); however, it may well be that technology induced deflationary pressures may serve to keep inflation low enough so that Fed “cannot” raise rates as much as they predicted. Also, who knows if they will follow through on starting to reverse QE this Fall/Winter. It may depend on the incoming data, but it seems at the moment that the Fed has the luxury of waiting for evidence that inflation is at least moving towards its 2+% objective.
What does this all mean?
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Low inflation = lower interest rates which is not so good for banks.
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Low interest rates promote economic growth so long as they are not too low (negative).
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Deflation would be a real fear and not good. Deflation can lead to reduced spending as it turns on its head the idea that a dollar today is worth more than a dollar tomorrow. If a dollar today is worth less than a dollar tomorrow people will tend to wait on spending since they can get more for their buck tomorrow. This would reduce economic output (recession) which is something that no one wants.
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The Fed needs to be more concerned about deflation than inflation so waiting on tightening monetary policy is a wise move. The Fed still seems to have the view that decreasing unemployment will eventually lead to a rise in inflation. We will see if this comes to pass or whether the deflationary pressures of technology will overwhelm the inflationary pressures of increasing employment.
It’s interesting to watch…
Chris