Much of the financial press is convinced that the minutes from the most recent FOMC meeting, released Wednesday, are showing a more hawkish Federal Reserve.
That’s because as employment continues to grow and inflation inches up, many Fed governors are worried that price growth may soon reach the bank’s 2% goal, and potentially rise well above that in coming years. “Some … members anticipated that economic conditions would soon warrant taking another step in removing policy accommodation,” read the minutes.
Fed minutes are frustratingly vague, in that they don’t indicate which Fed members are agitating for tigther policy, or where the balance of power stands in the debate between the hawks and doves. All we know for sure is that during the last meeting Esther George voted against leaving rates where they were, as she would have liked to see a 25-basis-point increase.
Nevertheless, there’s plenty of evidence in the minutes that the Fed will ultimately wait until at least December for the next rate hike. First, while the hawks on the FOMC are clearly getting anxious as the unemployment rate continues to fall, the doves are going the opposite direction, arguing that we may have much further to go until we reach full employment. The minutes read that some FOMC participants expressed great “uncertainty about the trajectory of inflation.” The minutes continue:
They saw little evidence that inflation was responding much to higher levels of resource utilization and suggested that the natural rate of unemployment, and the responsiveness of inflation to labor market conditions, may be lower than most current estimates.
This analysis dovetails with the increasingly accepted theory put forth by former Treasury Secretary Larry Summers that the economy is going through a period of secular stagnation, marked by widespread idle resources and chronically low inflation and interest rates.
Furthermore, as Vincent Reinhart, the chief economist for Standish Mellon who previously worked as an economist at the FOMC, points out, the leadership of the FOMC, Janet Yellen and William Dudley, “are among the most dovish members” of the committee. “Tightening has to be extracted from Janet Yellen . . . because she wants to test the economy’s potential.”
Reinhart argues, however, that Yellen still needs to raise rates every once in a while in order to maintain unity with more hawkish committee members. Luckily for advocates of loose policy, markets have actually been more dovish in their actions than the Fed’s own guidance, as evidenced by the fact that Fed Funds futures predict that there will be no tightening this year.
That’s a great position for Yellen to be in, because if she thought it was a problem—that cheap money was causing financial instability, for instance—she would be able to fix it easily by strongly hinting at an upcoming rate hike. On the other hand, if you think, as Yellen appears to, that financial conditions should remain quite easy, then you don’t have to do anything and can simply let low interest rates do their work.
In other words, Janet Yellen has markets right where she wants them. That’s why we shouldn’t expect her to rock the boat at the upcoming meeting in September, and that she may wait until as late as next year to make her next move.