Fed Minutes: Gradual Rate Hikes is Still Best Policy

Ignoring the pleas of President Trump and even CNBC’s Jim Cramer, the minutes from the Fed’s late September meeting revealed on Wednesday that policymakers remain convinced that continuing to gradually increase interest rates is the best policy to preserve steady growth in the economy.

The gist of the minutes of the September 25-26 Federal Open Market Committee session primarily reflected confidence in the rate of economic growth. However, for the first time, the central bank did express some concern over the impact that tariffs might have on the future path of economic growth.

At the end of discussions, while considering both the good and the bad, the FOMC unanimously voted to approve a 25-basis point hike to its benchmark rate target. In doing so, several members even indicated that more increases are on the way. The early chatter calls for another rate hike in December, three more in 2019 and one more in 2020.

“With regard to the outlook for monetary policy beyond this meeting, participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2 percent over the medium term,” the minutes read.

Fed policymakers also discussed the possibility that some time in the future, there might be a period where the central bank actually allows rates to go beyond normalization of rates and into a more restrictive stance. The minutes said that this move would be designed to control inflation from overshooting the central bank’s target and to address “the risk posed by significant financial imbalances.”

The FOMC also discussed the Trump administration’s current economic policies saying that they may even endanger the above-trend GDP gains seen during his presidency.

“Despite this optimism, a number of contacts cited factors that were causing them to forego production or investment opportunities in some cases, including labor shortages and uncertainty regarding trade policy,” the minutes said.

“In particular, tariffs on aluminum and steel were cited as reducing new investment in the energy sector. Contacts also suggested that firms were attempting to diversify the set of countries with which they trade, both imports and exports, as a result of uncertainty over tariff policy,” the summary added.

Finally, at the last meeting, the Fed removed the word “accommodative” from its description of the future policy path. After the September meeting, Powell told reporters not to read too much into the move. The minutes, however, revealed more detail on why the FOMC decided to change the language.

The minutes clarified that the change wouldn’t mean much because the Fed still remained well below is longer-run rate target, and it wouldn’t make sense to wait until the funds rate had been raised even more. The FOMC said that would suggest “a false sense of precision” of where the rate might be.

The minutes said including “accommodative” was not “providing meaningful information in light of uncertainty surrounding the level of the neutral policy rate.”

The Fed also said that future policy moves would “depend on the evaluation of incoming information and its implications for the economic outlook.

“In this context, estimates of the level of the neutral federal funds rate would be only one among many factors that the Committee would consider in making its policy decisions.”