When I left school, I would read the minutes of the Federal Reserve meetings as a reference to historical events. In those days, the minutes were released multiple years after the actual meeting. Those documents were a succinct way for me to recall what the economy was like and the focus of economists at that time. I stopped reading the minutes in the middle of the 1990s because I became highly focused on investments. As you might recall, investing was unhinged from the economy.
After ten years away from the minutes, I became fascinated again around 2007 as the market dropped significantly and the economy followed. Even though events were changing rapidly, the minutes were an interesting way to see how the thought processes were unfolding within the meetings.
Recently, the Fed has been making the minutes available on an accelerated basis. In fact, the minutes of the December meeting were released on January 8th. This is part of the agenda of the Fed to make signals more transparent to the securities markets. The minutes from the November meeting included some odd language that had not been discussed in previous meetings. Those comments were also in the December minutes. In what follows, I will reprint some of the minutes and add some comments. My point of reference for the comments arises from my consideration of what I am following during 2015.
The meetings have two teams that show up in the minutes: the staff and the participants. The staff includes analysts and other non-voting members of the Federal Reserve. The participants are the voting members. Here is the first comment from the staff:
Reflecting divergent economic and monetary policy prospects in the United States and abroad, the dollar appreciated substantially against most currencies over the intermeeting period. The dollar moved up significantly against the yen as the Bank of Japan expanded its asset purchase program as well as against the currencies of oil exporters as oil prices declined.
The part to notice the mention of the rise in the dollar. Maintaining the value of the dollar is the purview of the Treasury Department. It has been tradition for the Federal Reserve to not mention the dollar in its minutes. That changed in the November meeting and again, the dollar is mentioned in the December minutes. In addition, I was caught off-guard by the reference to “divergent” policy prospects. It is certainly true prospects for monetary policy are diverging, but the Fed has not mentioned it using this direct language. I applaud this inclusion.
The second highlighted comment comes from the participants’ economic view:
In their discussion of the foreign economic outlook, participants noted that the implications of the drop in crude oil prices would differ across regions, especially if the price declines affected inflation expectations and financial markets; a few participants said the effect on overseas employment and output as a whole was likely to be positive.
While I can certainly agree about the impact being different across regions, I would strongly disagree with the few who think it will be positive. The change in price has been too far too fast and there are likely to be severe impacts that will spread across our globalized economies. We are already seeing significant strains in Venezuela and Russia. Domestically, Helmerich & Payne announced they were stopping 50 wells and the CDS spreads on junk rated energy bonds tripled over the past week. Market dislocations are just now beginning and they were conceivable back in the middle of December.
The Federal Reserve should keep to its mandate regarding the economy of the United States. When they look at world economies, I get nervous because of the potential for them to think of themselves as a global central bank. Eventually, we will need one, but it will likely need to be independent of any government and global trade will need to be much higher than at present (in other words, national economies will need to be even more inter-connected).
Here are the list of risks to the economic outlook:
- …if declines in oil prices and the persistence of weak economic growth abroad had a substantial negative effect on global financial markets
- …the solid record of payroll employment gains in 2014 suggested that the real economy may end up showing more momentum than anticipated
- …the boost to domestic spending coming from lower energy prices could turn out to be quite large
- …a risk that [inflation] could run below their 2 percent objective
- …the recent substantial fall in energy prices could lead to a reduction in longer-term inflation expectations
- …if the unemployment rate continued to decline quickly, wage and price inflation could rise more than generally anticipated
I agree with all of those risks. Other risks that probably cannot be mentioned in such hallowed halls include a substantial rise in the dollar, Venezuela default, a rise in Japan government debt yield, and slowing economic activity in China.
The final quoted section comes from the Committee Policy Action section:
The Committee decided to maintain its policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.
I have been following the level of excess reserves at the Fed for some time and have a graph. While the quote doesn’t mention maintaining the full-level, I think that is what is implied. I am fully in favor of that. Especially, if it means normalizing targeted interest rates sooner. I’ll wrap up this post by mentioning I expect the December Federal Reserve balance sheet will be released tomorrow. I’ll update that graph and post a short comment about the change with that post. They clearly have not been maintaining the full level of QE4, but the weekly numbers have been rising late into December.