FOMC Minutes: Pre-FOMC Meet Held; Major Focus on Jobs Situation

April 9, 2014 09:18 AM

via a special arrangement with Informa Economics, Inc.

Participants agreed winter weather negatively affected economy; low inflation remains a concern

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

The U.S. employment situation remains a major focus for the Federal Reserve as evidenced by an extensive discussion at the March 18-19 Federal Open Market Committee (FOMC) meeting and a video conference session held March 4 on the topic. Link.

-- March 4 session: The focus on employment saw agreement among participants that the 6.5 percent unemployment threshold used in the forward guidance relative to any interest rate increase was "becoming outdated" given that the level was likely to be exceeded relatively soon.

While the quantitative level had been "useful" in signaling policy intentions, participants concurred that "with the economy having moved appreciably closer to maximum employment, the forward guidance should emphasize that the Committee is focusing more on a broader set of economic indicators. Thus, most participants felt that quantitative thresholds, triggers, or floors should not be a part of future statement language, with a number of participants noting the uncertainty associated with defining and measuring the unemployment rate and the level of employment that would be most consistent with the Committee's maximum employment objective, or other similar concepts."

At that pre-FOMC session, participants also backed "providing information about the likely behavior of the federal funds rate after its first increase."

Despite the discussion, the minutes noted the agenda for that session "did not contemplate any policy decisions, and none were taken."

-- March 18-19: The extensive discussion on employment continued, along with a focus on several areas, including the updated economic projections compiled by Fed members, the continued low inflation level, the impact of winter wheat on the US economy and the developments on the international side.

  • Economic projections:  Data in between the Jan. meeting and the March 18-19 session "indicated slower-than-expected growth in economic activity during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed. Inflation had continued to run below the Committee's longer-run objective, but longer-term inflation expectations had remained stable."

The shift in data did prompt some to "mark down somewhat their estimates of economic growth in late 2013 as well as their assessments of likely growth in the first quarter of 2014," but that not yet prompted a "a significant revision of their projections of moderate economic growth over coming quarters."

After a lengthy discussion, "several participants noted that the increase in the median projection overstated the shift in the projections. In addition, a number of participants observed that an upward shift was arguably warranted by the improvement in participants' outlooks for the labor market since December and therefore need not be viewed as signifying a less accommodative reaction function. Most participants favored providing an explicit indication in the statement that the new forward guidance, taken as a whole, did not imply a change in the Committee's policy intentions, on the grounds that such an indication could help forestall misinterpretation of the new forward guidance."

  • Winter weather: The "unusually severe winter weather had held down economic activity during the early months of the year," participants agreed. "Participants expected economic activity to pick up as the weather-related disruptions to spending and production dissipated."

  • Housing: While weather did likely negatively impact sales, "a few participants suggested that last year's rise in mortgage interest rates might have produced a larger-than-expected reduction in home sales. In addition, it was noted that the return of house prices to more-normal levels could be damping the pace of the housing recovery, and that home affordability has been reduced for some prospective buyers."

  • Employment situation: While improvement was noted, the minutes indicated a view that "Other labor market indicators, such as payrolls and hiring and quit rates, while not all showing the same extent of improvement, also pointed to ongoing gains in labor markets."


While there is slack in the US jobs market, "participants expressed a range of views regarding the amount of slack and how well the unemployment rate performs as a summary indicator of labor market conditions." Some of the factors cited also included the low labor force participation rate and the still-high rates of longer-duration unemployment and of workers employed part time for economic reasons, factors which may signal "considerably more labor market slack than indicated by the unemployment rate alone."

  • Inflation: The sub-2-percent inflation performance remains a concern point, the minutes said, "A couple of participants expressed concern that inflation might not return to 2 percent in the next few years and suggested that a protracted period of inflation below 2 percent raised questions about whether the Committee was providing an appropriate degree of monetary accommodation."

  • International developments: Factors mentioned in the minutes included slower growth in China and the Ukraine situation. The China slowdown "already put some downward pressure on world commodity prices, and a couple of participants observed that a larger-than-expected slowdown in economic growth in China could have adverse implications for global economic growth."


However, the Ukraine situation was likely to have "little direct effect on the U.S. economic outlook but might have negative implications for global growth if they escalated and led to a protracted period of geopolitical tensions in that region."

  • Forward guidance: Echoing the March 4 meeting view, "Almost all participants agreed that it was appropriate at this meeting to update the forward guidance, in part because the unemployment rate was seen as likely to fall below its 6-1/2 percent threshold value before long. Most participants preferred replacing the numerical thresholds with a qualitative description of the factors that would influence the Committee's decision to begin raising the federal funds rate."


Differences noted. While one participant suggested a 5.5 percent unemployment rate and a 2.25 percent projected inflation rate in the forward guidance, but "most participants "did not favor adding new quantitative language, preferring to shift to qualitative language that would describe the Committee's likely reaction to the state of the economy."

Comments: The two meetings detailed via the minutes released today underscore several points: The Fed remains very concerned about the labor market situation and how that relates to its forward guidance on interests and when any increase in the Fed funds rate were to unfold. The shifts in projections by the Fed members likely are overstating the potential for an interest rate increase. Inflation running below the Fed’s goal also remains a concern, with much exploration and discussion on what is causing this situation. And the question raised about how much the harsh winter weather has affected the US economy appears to have been answered and that answer is: "yes."

But in the end, few changes came out of the session except for the one that most expected – the dropping of the 6.5 percent unemployment rate as a threshold for the Fed to work with relative to when the Fed funds rate would increase. There was also no mention of the six month figure that Fed Chair Janet Yellen mentioned in her post-FOMC press conference, a mention which prompted a downturn in US financial markets as it appeared to them to suggest an earlier timeline potentially for raising interest rates than most apparently had been thinking. The minutes from the two sessions made clear that the Fed wants to emphasize that rates will remain low for an extended period and any increase in the Fed funds rate will be driven by multiple factors.

And the minutes apparently have further calmed the financial market worries that arose on Yellen’s comment about potential timing of any interest rate increase – US stocks rose following the minutes’ release.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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