FOMC minutes mix economic optimism and caution

Fed officials, economists and staff were more optimistic about the US economy than suggested in the three most recent FOMC statements where economic activity was described as rising at a moderate pace in October and December and a modest one in January.

In the minutes from the January 28-29 meeting participants noted that the risk outlook for the economy had improved since the December 10-11 FOMC.  The minutes highlighted a “cautious optimism” about the business sector which saw investment spending fall to nearly flat in the second half.  Staff assessments also observed that downside risks had diminished.

In addition to the ten voting board members, five alternate members, and three non-voting Fed presidents there are well over 75 economic, technical and support staff in attendance at these policy meetings.

A number of members expressed concerns about the economic effects of the corona virus on China and the world economy. 

Though the mainland health crisis was not mentioned in the FOMC statement from the January meeting, concrete details being lacking at the time, Chairman Jerome Powell covered it in the press conference following and in last week’s Congressional testimony.  In the House he said the Fed was “carefully monitoring the situation, and that, “We have to resist the temptation to speculate on this.”

Most participants said they expected inflation to move towards the bank’s 2% target for the core PCE rate.   A few officials said they thought there had been a “modest step up in price changes in 2019.

However, this looking forward to the eventual return of symmetric 2% inflation has been the bank’s long-standing rhetorical position.  In fact the core PCE target has been observed almost entirely in the breech.  Over the past ten years, 120 months, the rate has been above the 2% target in just 5 months, at target in 10 for a total of 15 months or 12.5%.  Inflation has been below target for 87.5% of the time, 105 months.

The Fed’s own economic projections released in December anticipate no rate changed this year and one increase in 2021. 

Market perceptions differ pricing in about two 0.25% cuts by year end.  The CME FedWatch gives a 25.4% change of at least a 25 basis point cut by the April 20 FOMC, rising to 44.6% in June,  57.4% in July, 69.3% in September   72.9% in November and 83% by the December 20 meeting.

The estimates of the futures markets tend to be volatile and it is possible that some of these odds are based on the unknown but dangerous potential from the Chinese epidemic.

American equity averages were higher on Wednesday with the DJIA gaining 0.4%, 115.84 points to 29,48.03 and the S&P 500 adding 15.86 points, 0.47% to 3,386.15.

Treasury rates were unchanged with the 2-year at 1.43% and the 10-year at 1.58%.

The dollar was higher on the day Wednesday closing at 1.0795 versus the euro the best for the US currency since April 2017 and 111.24 against the yen, its highest since early last May.