Here are highlights of some confirming reference views, implications for policy change or influence, strong argument against currently held policy views and generally striking comment from the FOMC minutes released this week.
Statement of Longer-Run Goals and Monetary Policy Strategy:
FOMC: ‘The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Martin McGuire: A willingness to explain monetary policy decisions is not the same as explaining in real-time the reasoning and theory application that builds to that decision. The transparency available from clearly explained decisions is what the Fed offers and we are charged with recognizing those likely decisions well in advance of their announcement.
Developments in Financial Markets and Federal Reserve’s Balance Sheet:
FOMC: ‘The reverse repurchase operations authorized by this resolution shall be offered at a fixed rate that may vary from zero to five basis points, and for an overnight term, or such longer term as is warranted to accommodate weekend, holiday, and similar trading conventions. Any change to the offered rate within the range specified above or the per-counterparty bid limits will require approval of the Chairman.’
MM: The Fed has extended the ON RRP to Jan 30, 2015 ‘for the purpose of further assessing’. The Chair has capacity to increase the size of the ‘per-counterparty bid limits (currently held to $3B) but can only adjust rate within the 0-5bp band. This is not an obstacle to effective policy enactment until the program goes ‘operational’ – likely sometime early next year.
Staff Review of Economic Situation:
FOMC: ‘Among other indicators of labor market conditions, the rate of job openings edged up in recent months, and the share of small businesses reporting that they had hard-to-fill positions trended up. Measures of firms' hiring plans were higher than a year earlier, but the rate of gross private-sector hiring was still low. Initial claims for unemployment insurance moved down, on balance, over the intermeeting period, and household expectations of the labor market situation improved, on net, in December and early January.’
MM: Fed has made clear the policy implications of labor data outside of the unemployment rate. Aside from declining rate of long-duration unemployment, these areas were addressed as being positive. FOMC: ‘Manufacturing production increased at a robust pace in the fourth quarter, with broad-based gains across industries. Indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, were consistent with a further expansion in factory output early this year, but automakers' production schedules indicated that the pace of light motor vehicle assemblies would decline in the first quarter.’
MM: I had not expected the Fed to have described the manufacturing sector in such robust terms. Light-auto expected to offer some drag.
FOMC: ‘In December, the components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE increased strongly, although sales of light motor vehicles declined after posting a large gain in November.’
MM: It has been an extended period since signs of support for higher prices have been reflected in PCE the Fed’s favored inflation guide.
FOMC: ‘Households' real disposable income was little changed in October and November, and the expiration of the emergency unemployment compensation program at the end of 2013 was expected to reduce aggregate income growth early this year. However, households' net worth likely continued to expand in recent months as a result of rising equity prices and home values. Consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers improved, on balance, in December and early January after a decline in the fall of 2013.’
MM: Mixed look at real disposable income, but support expected by rising equity and home prices combined with rising sentiment. There is room to overestimate the support from higher equity prices, but home price increases and improved perception of job prospects should support consumption.
FOMC: ‘Real private expenditures for business equipment and intellectual property products appeared to strengthen in the fourth quarter, as nominal shipments of nondefense capital goods rose at a solid pace.’
MM: Fed goes on to indicate that while orders were revised downward from Nov/Dec, orders were still above shipments, suggesting near-term gains in capital spending.