On December 14, 2004, the Federal Open Market Committee announced that they would release the minutes of each meeting with a three week lag. This is a vast improvement from the previous release of the minutes which ranged from a six to eight week lag. While the FOMC releases a statement after each meeting which describes the policy action (or inaction), the minutes generate a lot of attention in the financial markets because they reveal more details on the discussion of the most recent FOMC meeting. Why Investors Care
Highlights
The minutes of the FOMC meeting held on May 9, 2007 indicate the FOMC found that the risk of inflation remaining too high outweighs the risk of too weak economic growth. In fact, the FOMC had determined that downside risks "have diminished slightly." The risks of too high inflation remained the key concern.
"Nearly all participants viewed core inflation as remaining uncomfortably high and stressed the importance of further moderation. Although readings on core inflation in March had been more favorable, this followed several months of elevated inflation data and price pressures were not yet viewed as convincingly on a downward trend. Most participants expected core inflation to moderate gradually, fostered in part by stable inflation expectations and a likely deceleration in shelter costs. . . . All participants agreed that the risks around the anticipated moderation in inflation were to the upside; and some noted that a failure of inflation to moderate could entail significant costs particularly if it led to an upward drift in inflation expectations."
The FOMC still sees labor markets as tight. Housing is expected to be soft longer than previously expected but not have notable spillover effects. Consumer spending has moderated but business investment is expected to pick up while foreign economic growth should help support U.S. exports. Overall, economic growth should be slightly below potential during 2007 but return to potential in 2008. Core inflation is expected to slowly ease over the next two years. However, the rise in energy prices is a concern for this outlook.
The bottom line is that the risks of recession have essentially faded away. The FOMC sees the U.S. economy only slightly below potential - suggesting only slow progress on the inflation front. A key question is that if the U.S. economy returns to potential in 2008, then why will inflation ease in 2008? Essentially, the U.S. economy is likely to be on a moderate growth path in coming quarters with only marginal improvement in core inflation. And with little chance of a reduction in short term interest rates anytime soon.
The next FOMC meeting is scheduled for June 27-28, 2007.
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