The Fed’s July Minutes show it inching towards the exit


Andrew Harrer/Bloomberg

Here's the Federal Reserve's last meeting, in one sentence: Everything is going according to plan, and it might be doing so faster than expected.

That's because unemployment has fallen further than the Fed thought it would, and inflation has slowly risen from its too-low level towards its two percent target. But it's not clear how far and how fast this will continue. So the plan remains the same—for now. The Fed will finish tapering in October, wait a "considerable time", start raising rates, and then shrink its balance sheet.

The question, of course, is how long a "considerable time" will be—or if it will even be considerable at all. It's possible, as the minutes from the Fed’s policy meeting in July show, that it might not be as long as we think if the labor market keeps improving like it has been.

The transcript of those minutes, released Wednesday, also show that officials are in open disagreement about the Fed’s next steps, a debate that is likely to play out this weekend during the Fed’s annual economic conference in Jackson Hole, Wyo. Several officials, though they appear to be a minority, believe the central  bank should raise rates more quickly to rein in the potential for inflation.

Here are the three big takeaways from the minutes.

1. "Many participants" still see plenty of slack left in the economy. As they point out, there are still a lot of long-term unemployed and part-time workers who want full-time jobs. Not only that, but wages haven't gone up much either, which many of them "attributed ... to the remaining slack in the labor market."

2. Low wage growth might be hurting the economy. Right now, the Fed thinks there's as much risk of the economy overheating as cooling off too much. But of those downside risks, two of the biggest are "persistent weakness in the housing sector" and "a continued slow rise in household income."

3. But "many participants" think the Fed might need to raise rates sooner if the labor market continues its slightly-more-rapid recovery. This is the part that got Wall Street's attention. The Fed "generally agreed" that "labor market and inflation conditions had moved closer to the Committee's long-run objectives." But "many" of them thought that "if convergence towards the Committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary accommodation sooner than currently anticipated." Translation: the Fed might raise rates sooner if unemployment keeps falling fast.

Emphasis on the word "might." After all, Fed Chair Janet Yellen doesn't sound like she's in any hurry to start raising rates. That's because she thinks the costs of hiking too soon are worse than the costs of hiking too late. Although she might have to convince her colleagues of that.

 

Matt O'Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at The Atlantic.
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