January FOMC Minutes Preview: The economic comparisons accumulate

The Federal Reserve will release edited minutes of the January 28-29 FOMC meeting on Wednesday February 19 at 19:00 GMT, 14:00 EST.

Federal Reserve policy

Having demonstrated their determination to keep the US expansion running with three rate cuts in the summer and fall of last year, the Fed governors have been united in their economic and policy assessments for two meetings.

The signing of the US-China trade agreement in January and the completion of the UK exit from the European Union removed the two most dangerous threats to global growth and the effects of the partial shuttering of the Chinese economy from the corona virus are as yet of uncertain severity and duration.

January’s non-farm payrolls at 225,000, annual hourly earnings and fourth quarter GDP suggest that the concerns in the US may have been overstated or the 0.75% in rate reductions were quietly effective. The unexpected return of manufacturing PMI to mild expansion at 50.9 in January after five months in contraction is an indication that the US economy may be over the year long decline in the factory sector.

Fed interest rate policy has been in neutral since the October meeting and no change in anticipated through the end of the year. The Projection Materials released at the December 10-11 FOMC meeting predicted a stable fed funds rate until sometime in 2021. The next set will be issued at the March 17-18 meting. 

Chairman Powell in Congress

Mr. Powell testified in the House Financial Services Committee on February 11 and the Senate Banking, Housing and Urban Affairs Committee on the February 12 in his semiannual monetary policy appearance.  

In notes he has played often before he said, ”We find the US economy  in a very good place…wages [are] moving up most at the bottom  end of the wage scale…it’s great to see.”  “We have learned that unemployment can be lower than many had thought without increasing inflation.”

In Fed's analysis the US is not at risk for a recession.  “There is no reason why the expansion can’t continue. There is nothing about this expansion that is unstable or unsustainable.”

Trade worries have also ebbed. “The signing and implementation of the USMCA agreement will be a positive for the economy, in that it removes some uncertainty on trade.” The Chairman has in the past observed that the US-China trade pact has reduced tensions between the nations.

As for the impact of the corona virus on the Chinese economy and by degree the US and the world it is too early to tell.  

“We will be watching this carefully.  What will be the effects on the US economy? …Will they be material?”  “We have to resist the temptation to speculate on this.”

Spillover effects on the US economy are “very likely” but China’s Asian neighbors and major trading partners in Europe have greater risks. The effects on the US would have to "persistent" for the Fed to consider policy support. 

”The People's Bank of China has done a number of things to support economic activity and I think you can expect the Chinese government to do a lot of things to support economic activity,” he observed.

Echoing the January FOMC statement he said he expected the current stance of monetary policy to remain “appropriate.”

 FOMC Minutes

The minutes are an edited transcript of the discussions at the governors’ meeting. They are not policy directives and at best provide detail and clarity for the concerns and decisions of the board.  

Three areas of interest that these minutes may elucidate will be the Fed’s current inflation policy review, the debate about the size of the balance sheet and the extent of the economic danger from the China health crisis.

Dollar comparisons

The US dollar reached a nearly three year high against the euro at 1.0785 on Tuesday as sentiment continued to weaken in Germany the Eurozone’s largest economy.

The ZEW Economic Sentiment Index in February plunged to 8.7 from 26.7  and was far below the 21.5 forecast was the latest example of a list that now includes factory orders, industrial production, exports, imports and GDP.  

The Fed minutes will likely reinforce the bank view that the US economy has overcome its recent doldrums and, all economic things being equal, is set for a better 2020.