Fed’s September Minutes Explained the Rationale of Removing Forward Guidance, Showed More Concerns about USD Strength

Central banks news

The FOMC minutes for the September meeting contained little news regarding the rationale of the 25 bps rate hike last month, as well as the future path of monetary policy normalization. Yet, there are some points worth nothing. First, the minutes explain why the “accommodative” guidance was removed. Second, the Fed appeared more concerned about USD’s strength than previously anticipated. The “new” information conveyed in the minutes does not change the path of Fed’s rate hike schedule, i.e. one more rate hike by December, followed by three more in 2019.

As noted in the minutes, the members discussed a number of points regarding removal of the reference that “the stance of monetary policy remains accommodative”. For instance, they believed that, while characterizing the policy stance as “accommodative” had provided “useful forward guidance in the early stages” of the policy normalization, this was “no longer providing meaningful information” as the level of the neutral policy rate is uncertain. They believed it is appropriate to remove the characterization of the policy stance before” the target range for the federal funds rate moved closer to the range of estimates of the neutral policy rate”.

Meanwhile, the members also judged that “waiting until the target range for the Fed funds rate had been increased further to remove the characterization of the policy stance as “accommodative” could convey a false sense of precision in light of the considerable uncertainty surrounding all estimates of the neutral Fed funds rate”.

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Regarding recent strength of US dollar, the Fed noted the downside risks driven by the “the divergence between domestic and foreign economic growth prospects and monetary policies”. Moreover, “a number of participants noted that financial conditions remained accommodative: The rise in interest rates and appreciation of the dollar over the inter-meeting period had been offset by increases in equity prices, and broader measures continued to point to accommodative financial conditions.”. There were other members citing “the waning of fiscal stimulus, less accommodative monetary policy, or anticipated appreciation of the dollar as factors contributing to their forecasts for a moderation of real GDP growth over the course of the projection period”.

Overall, the minutes affirmed that removing “accommodative” language in the forward guidance should not be interpreted as a signal of a change in expectations for future rates. the move is rather a sign that forward guidance is losing its function in setting expectations. The Fed reiterated that the monetary policy stance should remain gradual