November Meeting Minutes Brings Balance and Gradualness to Fed Assessments
- Echoing the watchwords of the moment, if the economy evolves largely as expected participants expected “it would likely be appropriate to move gradually toward a more neutral stance of policy over time.”
- “Almost all” participants in the meeting judged that dual mandate risks are “roughly in balance.”
- Having started fast the Fed believes can start to slow the pace of rates as they get closer to a “more neutral” stance (something mild-to-moderately restrictive reflecting lagged inflation risks and over-heating fears) but remain willing to respond to any more apparent weakness in the labor market.
- The recent data flow seems to be convincing the Fed that after a risk-free first 75bps of cuts, they should be more data dependent, careful, and gradual as they likely keep cutting until stabilizing data and shifting risks get them to go on an extended pause.
- A December skip certainly seems possible (market pricing only ~60% chance of a cut says as much) and likely depends on the November inflation data. The raft of labor market data between now and the meeting will also play a roll but it seems more likely to lock a cut in through weakness than independently push them to not cut, if there is no confirmation of additional heat in the November inflation data.
- None of my continued modal base case cuts (Dec, Mar, and June) seem incredibly high likelihood individually and, given the skews in the near-term forecast, the expected value of that path is closer to 2 cumulative cuts than 3, even if 3 tentatively remains the path around the modal data outlook for now.
Into the Weeds
- Compared to September, “upside risks to the inflation outlook were seen as little changed, while downside risks to employment and growth were seen as having decreased somewhat.” This shift is entirely inline with the data flow between the meetings. When paired with the comments about roughly balanced risks between the two sides of the mandate it highlights the downside driven nature of September’s move.
- The Committee’s baseline inflation forecast continues to assume inflation will remain well-behaved and return sustainably towards target. As Gerad has noted frequently, the Fed seems to be more dismissive of the hotter-than-forecast housing inflation numbers given core goods and core services ex housing developments, as well as broadly target consistent new lease inflation.
- In reading the inflation section of the Committee’s discussions, it seems notably skewed towards searching for optimal outcomes (if the labor market is neutral and you assert inflation expectations are anchored then there is no medium-term inflation problem that’s possible). While “month-to-month movements [in inflation] would remain volatile” they seem to be getting into the habit of making slightly-too-optimistic forecast assumptions then having those be falsified by the data, as the likely October data and the 0.2-0.3% revision higher in their likely 2024 core PCE forecasts since September highlight. The “couple” who noted that inflation’s return to target “could take longer than previously expected” seem to have the data on their side.
- Participants baseline description of the labor market remains “solid… with a gradual easing in labor demand,” and “broadly consistent” with the FOMC’s view of full employment.
- The recent data is full of “temporary fluctuations” making assessing the underlying state of the economy, labor market in particular, challenging.
- That fairly healthy baseline is largely framed in the context of a downside skew, even if that left tail is smaller than in September. Participants noted that firms “were becoming more selective in hiring,” and a few who heard that “business contacts who were using attrition, instead of layoffs, to manage the size of their workforce.”
- Since the meeting, there has been an increasing acknowledgement that the neutral rate may have drifted higher post-covid and could be surprisingly close to policy rates (this is particularly true in real terms given still elevated spot inflation), attenuating the need for cuts as fast and as deep as was expected even as recently as the September meeting.[1] The Minutes summarize the impact of this on the policy rate outlook by noting that “many participants observed that uncertainties concerning the level of the neutral rate of interest complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce policy restraint gradually.”
- Powell’s comments in mid-November that “the economy is not sending any signals that we need to be in a hurry to lower rates” highlight the notable shifts in the policy baseline having already eased 75bps and having seen reduced left tail risks in the labor market and some upside inflation surprises.
- A December skip certainly seems plausible (market pricing only ~60% chance of a cut says as much) and likely depends on the November inflation data. Spicy labor market data between now and then could possibly convince them not to cut but it would likely need to be paired with ‘not good’, if not necessarily outright ‘bad’, inflation data.
The shift in labor market left tails since then has also likely shifted the Fed’s base case policy some because even base case, as expected policy, should exhibit some responsiveness to tail risks in the underlying data so as to help keep them from materializing. ↑
