New Monetary PolicyThese are unprecedented times for monetary policy and it's compounded by abnormally low energy rates. Even if labor indicators improve and inflation remains at the 2% target, oil prices are a wild card. The FOMC may not feel comfortable raising rates until they believe:
- Energy rates are back to "normal" with no impact on inflation.
- Energy rates will remain low and there's no worry of an impending or surprise increase.
What Do FOMC Meeting Notes Tell UsTo get a better understanding for how the FOMC feels about the probability of a hike we can data mine the minutes from the last FOMC meeting. The dominant argument is to keep rates low; examples provided below:
- Raising rates too soon could "damp the apparent solid recovery in real activity and labor market conditions, undermining progress toward the Committee's objectives of maximum employment and 2 percent inflation."
- Raising rates too soon "would increase the likelihood that the Committee might be forced by adverse economic outcomes to return the federal funds rate to its effective lower bound." Committee members noted the "challenges associated with the prospect of commencing policy tightening at a time when inflation could be running well below 2 percent..."
- Raising rates too soon could lead to reputation and effectiveness issues, "..the public could come to question the credibility of the Committee's 2 percent goal."
- One person on the committee recommended "in light of the outlook for inflation, the Committee consider ways to use its tools to provide more, not less, accommodation."
Consumer price inflation moved further below the FOMC's longer-run objective of 2 percent, held down by continuing large decreases in energy prices.It goes on to say:
The staff's outlook for economic activity over the first half of 2015 was revised up since December, in part reflecting an anticipated boost to consumer spending from declines in energy prices.Clearly, the FOMC believes lower energy prices have contributed to lower inflation and a better economy by boosting household purchasing power, which means they believe it can also have the reverse effect if prices rebound. This volatility translates into uncertainty and it's just one of the many risks FOMC members are finding hard to digest. "Many participants," the notes said,
indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.