The Fed meeting minutes showed optimism about the economy. In addition, some seemed to have assumed fiscal stimulus from Trump. Here are 4 take aways from Trump:
Here is their view, courtesy of eFXnews:
The minutes to the December FOMC meeting, in our view, provide little new information relative to what we learned from the FOMC statement, the policy action to raise the federal funds rate, and the press conference at the December meeting. Our main take-away is that the monetary policy outlook, as reflected in the dot plot and summary of economic projections, is still largely based on pre-election assumptions. Although the minutes indicate that Fed staff and many FOMC participants incorporated expansionary fiscal policy in their forecasts, the changes were generally minor and offset by the expectation that long-dated interest rates would be higher and the dollar would appreciate. While the Fed signaled that it would likely respond to expansionary fiscal policies with a faster pace of rate hikes, the Fed believes it is too early to embed this into its baseline. Any real shift in the stance of monetary policy will require more clarity on the stance of fiscal policy. Altogether, we see the Fed as waiting and reacting to developments in fiscal policy, which is a significant change from the past decade when monetary policy took the lead role in responding to the crisis.
After taking a look at the details of the minutes, we make the following observations:
1. The minutes indicate that Fed staff’s forecast for real GDP growth over the next several years was “slightly higher” than in September, “largely reflecting the effects of the staff’s provisional assumption that fiscal policy would be more expansionary.” However, these effects were “substantially counterbalanced” from the assumption that the path for long-term interest rates and the foreign exchange value of the dollar would be higher. On net, this meant that the staff’s outlook for activity, inflation, and unemployment was largely unchanged relative to that prior to the election. The staff still sees numerous downside risks.
2 · Like the staff, “almost all” FOMC participants indicated that upside risk to their forecasts for growth “had increased as a result of prospects for more expansionary fiscal policies” over the forecast horizon. Some members also noted more favorable business investment given the uptick in business sentiment, while others pointed to downside risks from a stronger dollar, financial vulnerabilities in some foreign economies, and constraints from policy being near the lower bound. There appeared to be little to no discussion on supply side effects of expansionary fiscal policy and tax reform. On balance, FOMC participants still considered it far too early to judge how the outlook for the economy and, in turn, monetary policy had changed following the election.
3. At two different places in the minutes, FOMC members shared their concern about an undesired undershooting of the natural rate of unemployment. In discussing the possible implications of a more significant undershooting of unemployment than currently envisaged, “many participants emphasized that”¦timely adjustments to monetary policy could be required to achieve and maintain” the dual mandate. “Most participants” also judged that the risk of a “sizeable undershooting” of the longer-run unemployment rate had risen “somewhat” and, as a result, the FOMC “might need to raise the federal funds rate more quickly than currently anticipated” to limit potential upside risk to inflation. In our view, the committee is clearly signaling that, should expansionary fiscal policy be forthcoming, and, should such policies generate a further decline in the unemployment rate and faster firming inflation, then the committee would likely respond by raising rates faster than the three-rate hike median in the dot chart. In other words, monetary policy will not be passive in the face of expansionary fiscal policy.
4 · While at several places the minutes contain discussion on fiscal policy and its potential effects on the economic outlook, the minutes make no mention of restrictive trade policies. In our view, the discussion on the balance of risks is incomplete and, hence, may evolve. The Fed’s assessment of the balance of risks to the outlook and the effects of fiscal policy are likely to change as the Trump administration provides additional clarity on fiscal and trade policy plans.
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