The minutes from the FOMC’s March 19-20 meeting showed Fed members’ increasing comfort with their patient approach to monetary policy. This is justified by an outlook for economic growth that is slowing to a rate close to estimates of longer-run potential, inflation that is showing little signs of heating up despite continued improvement in the labor market, and by heightened uncertainty due to trade policy and international developments.
Participants noted the recent slowing in economic activity, but repeated expectations that it would gain speed in the months ahead, supported by the improvements in financial conditions and consumer and business sentiment.
Comments on inflation noted that it has come in softer than expected, and has not picked up despite “strong labor market conditions and rising nominal wage growth, as well as short-term upward pressure on prices arising from tariff increases.”
Key Implications
As in past FOMC minutes, discussions around inflation were central. The discussion made clear that further tightening in the labor market would not cause them to change course on policy unless it was accompanied by clear signs that inflation is moving higher. The onus is on the data, not modelled relationships to drive future policy. While this may suggest some risk that policy falls behind the curve, and becomes more reactionary rather than anticipatory, with several years of inflation falling short of target, the Fed can clearly afford to ere on the side of allowing it to run a bit hot. This is especially true as inflation expectations, as noted in these minutes, are currently at the lower end of their historical range.
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