Fed minutes set stage

This article first appeared at The Hill:

On Wednesday, the Federal Reserve released minutes from the Federal Open Market Committee’s most recent meetings, which occurred on Jan. 31 and Feb. 1, respectively.

The minutes show that both short- and long-term interest rates will be moving up over the next few years, which will make it more expensive for American consumers to borrow, but will benefit savers.

The Federal Open Market Committee (FOMC) is the Federal Reserve’s monetary policy-making body; it sets short-term interest rates to meet its dual mandate of price stability and maximum, stable employment.

According to the meeting minutes, the FOMC believes it is making progress toward these goals. Inflation has been below the FOMC’s 2 percent target (measured using the personal consumption expenditures price index) for years, the result of significant slack in the economy that has limited the ability of businesses to raise prices.

In addition, weak wage growth, a strong U.S. dollar and the big drop in energy prices from mid-2014 to mid-2016 have all contributed to the tepid inflation numbers.

But with energy prices rising over the past half-year and wage growth picking up as the job market tightens, inflation is moving toward that 2 percent target.

The minutes state that, “Information on inflation received over the intermeeting period was broadly in line with participants’ expectations and was consistent with a view that PCE inflation was moving closer to the Committee’s 2 percent objective.”

The second part of the dual mandate is more difficult to define because the unemployment rate associated with “maximum and stable employment” can fluctuate over time.

According to the minutes, “at 4.7 percent in December, the unemployment rate remained close to levels that most participants judged to be consistent with the Committee’s maximum-employment objective.”

The unemployment rate moved up to 4.8 percent in January, but that type of month-to-month fluctuation is normal and doesn’t change the overall labor market picture. The FOMC also looks at other labor market indicators, and according to the minutes, they also show a job market that is close to full employment.

The minutes say that the job market should continue to improve: “Most participants still expected that if economic growth remained moderate, labor markets would continue to tighten gradually, with the unemployment rate running only modestly below their estimates of the longer-run normal rate.”