From the Fed minutes:
Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants regarded the information received over the intermeeting period as suggesting that economic growth had slowed during the winter months, in part reflecting transitory factors. The pace of job gains had moderated, and the unemployment rate had remained steady, with a range of labor market indicators suggesting that underutilization of labor resources was little changed. Most participants expected that, following the slowdown in the first quarter, real economic activity would resume expansion at a moderate pace, and that labor market conditions would improve further. Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remained low, while survey-based measures of longer-term inflation expectations had remained stable. Participants generally anticipated that inflation would rise gradually toward the Committee’s 2 percent objective as the labor market improved further and the transitory effects of declines in energy prices and non-energy import prices dissipated. Participants judged that recent domestic economic developments had increased uncertainty regarding the economic outlook. While participants continued to see potential downside risks resulting from foreign economic and financial developments, most still viewed the risks to the outlook for economic growth and the labor market as nearly balanced.
Participants generally agreed that data on private spending for the first quarter had been disappointing, with unexpectedly weak household expenditures and investment spending. Retail sales had continued to be tepid, although consumer sentiment stayed high and auto sales rebounded in March. The recovery in the housing sector remained slow. Business fixed investment softened, in part reflecting sizable reductions in capital expenditures in the energy sector. Exports contracted, likely reflecting the damping influence of the dollar’s appreciation. In combination with a decline in government spending, the weakness of private spending had led to a substantial slowing in economic growth in the first quarter.
Participants discussed whether the weakness of spending in the first quarter primarily reflected temporary factors or instead suggested a longer-lasting loss of momentum for the economy. A number of reasons were advanced for believing that the weakness in spending observed during the first quarter was partly or even largely transitory. Most notably, the severe winter weather in some regions had reportedly weighed on economic activity, and the labor dispute at West Coast ports temporarily disrupted some supply chains. Furthermore, a pattern observed in previous years of the current expansion was that the first quarter of the year tended to have weaker seasonally adjusted readings on economic growth than did the subsequent quarters. This tendency supported the expectation that economic growth would return to a moderate pace over the rest of this year. Participants also pointed to other reasons for anticipating that the weakness seen in the first quarter would not endure. A number of the fundamental factors that drive consumer spending remained favorable, among them low interest rates, high consumer confidence, and rising household real income. In addition, business contacts in several parts of the country continued to be optimistic and expected sales, investment, and hiring to expand over the rest of the year. In the agricultural sector, drought effects had worsened in some parts of the country, but effects on production were limited and planting intentions remained strong. Finally, if the decline in oil prices and the rise in the foreign exchange value of the dollar did not continue, then their influence on the growth rate of investment and the change in net exports would likely recede.
Various reasons were also advanced for believing that some of the recent weakness in the pace of economic activity might persist. A number of participants suggested that the damping effects of the earlier appreciation of the dollar on net exports or of the earlier decline in oil prices on firms’ investment spending might be larger and longer-lasting than previously anticipated. In addition, the expected boost to household spending from lower energy prices had apparently so far not materialized, highlighting the possibility of less underlying momentum in consumer expenditures than participants had previously judged. Some participants expressed particular concern about this prospect, as their expectations of a moderate expansion of economic activity in the medium term, combined with further improvements in labor market conditions, rested largely on a scenario in which consumer spending grows robustly despite softness in other components of aggregate demand. Participants discussed downside risks to economic growth, and a few indicated that, in their assessment, such risks had risen since the March meeting. However, most participants continued to see the risks to the outlook for economic growth and the labor market as nearly balanced.
In their discussion of the foreign economic outlook, several participants noted that the foreign exchange value of the U.S. dollar had fallen back somewhat over the intermeeting period. Nonetheless, the value of the dollar had increased significantly since the middle of last year, and it was seen as likely to continue to be a factor restraining U.S. net exports and economic growth for a time. It was suggested that one element underpinning the strength of the U.S. dollar was the increasing prevalence of negative interest rates on sovereign debt in some key European economies. Participants also pointed to a number of risks to the international economic outlook, including the slowdown in growth in China and fiscal and financial problems in Greece.
Many participants judged that the pace of improvement in labor market conditions had slowed. The March increase in payrolls had been smaller than expected, and the unemployment rate had remained steady. However, it was noted that the intermeeting period had also witnessed some more-positive news on labor market conditions, including a further increase in the rate of job openings. Various business contacts in energy-related sectors reported layoffs in response to low oil prices, but some information received from business contacts suggested a tightening in labor markets, with shortages of skilled labor reported in some areas and sectors; there had also been an increase in transitions of workers to better-paying jobs. Larger wage gains were also reported in some regions, although in other parts of the country wage pressures reportedly remained muted. One participant suggested that a significant rise in aggregate nominal wage growth should be a criterion in assessing the Committee’s degree of confidence regarding the return of inflation to the Committee’s 2 percent longer-run objective. However, a couple of other participants argued that the behavior of nominal wage growth should not play a significant role in that assessment, on the grounds that there was only a loose relationship between nominal wage growth and inflation in the United States.
Many participants noted that measures of inflation averaged over several months or more continued to run below the Committee’s longer-run objective. However, this shortfall partly reflected the earlier declines in energy prices and decreasing prices of non-energy imports, and some participants pointed out that, by some measures, the most recent monthly inflation readings had firmed a bit. Although participants expected that inflation would continue, in the near term, to be below the Committee’s 2 percent longer-run objective, energy prices were no longer declining and most participants continued to expect that inflation would move up toward the Committee’s 2 percent objective over the medium term as the effects of the transitory factors waned and conditions in the labor market and the overall economy improved further. Survey-based measures of inflation expectations had remained broadly stable. Market-based measures of inflation compensation had risen slightly but remained low. One participant suggested that, in the past, market-based measures of inflation compensation had been of little value in predicting inflation one to two years ahead, and that measures of inflation expectations from surveys of professional forecasters were more useful for forecasting inflation. Another participant argued that low values for market-based measures of inflation compensation should concern policymakers, on the grounds that these low values reflected investors placing at least some likelihood on adverse outcomes in which low inflation was accompanied by weak economic activity.
In their discussion of communications regarding the path of the federal funds rate over the medium term, participants expressed a range of views about when economic conditions were likely to warrant an increase in the target range for the federal funds rate. Participants continued to judge that it would be appropriate to raise the target range for the federal funds rate when they had seen further improvement in the labor market and were reasonably confident that inflation would move back to its 2 percent objective over the medium term. Although participants expressed different views about the likely timing and pace of policy firming, they agreed that the Committee’s decision to begin firming would appropriately depend on the incoming data and their implications for the economic outlook. A few anticipated that the information that would accrue by the time of the June meeting would likely indicate sufficient improvement in the economic outlook to lead the Committee to judge that its conditions for beginning policy firming had been met. Many participants, however, thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, al-though they generally did not rule out this possibility.
They’re in no hurry. Early 2016 still looks the go.
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