The minutes from the November meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve are out. Something that comes across is growing uncertainty, which could have implications for CRE.
Developments in financial markets were largely a set of surprises. Nominal Treasury instruments’ yields (without taking out inflation) “ included stronger-than-expected data releases and monetary policy communications” that the Fed took as indicating the need for a “more gradual pace of policy easing than previously thought.”
“Gradual” was a recurring theme during the meeting. It returned when some of the FOMC participants reacted to financial market quotes that “increased notably” and “stronger-than-expected data releases” and “higher-than-expected” inflation numbers thought that a “more gradual approach to addressing monetary policy — changes in the federal funds rate and to handling selloff of bonds — would be wise.
Declines in job vacancies, the rate at which people quit jobs, and reduced turnover were “consistent with a gradual easing in labor demand.” As full employment is one of the Fed’s dual mandates, the state of the labor market is a factor the central bank closely follows to determine whether monetary policy should be tighter or looser.
Then there was discussion that if data came in as expected, as inflation continued to move down toward the 2% target, and the economy still at near maximum employment, “it would likely be appropriate to move gradually toward a more neutral stance of policy over time.” In other words, adjust monetary policy so that it neither slows or encourages growth and expect that to happen more slowly.
And then came the fifth and final use. “Many participants observed that uncertainties concerning the level of the neutral rate of interest complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce policy restraint gradually.”
This is similar to what the Fed has been saying for a year or more. They will follow the data. It will take time. They have to worry about both parts of their mandate: stable prices and full employment.
Some think that the Fed will continue a process of rate reductions. “The minutes did nothing to alter my view that the policy rate is going to be adjusted lower next week and will continue to do so through the next calendar year,” Jamie Cox, managing partner for Harris Financial Group said in emailed remarks.
But as Priscilla Thiagamoorthy, senior economist and vice president, economics at BMO Economics wrote, “Earlier this month, Chair Powell noted that there was no ‘hurry’ to cut rates and the minutes from the FOMC’s last meeting confirm a broad support for taking a more cautious approach in easing monetary policy.
Markets have misread the central bank many times in the past. Taking a breath for a reassessment might be wise.