The November FOMC Minutes: How Long Is “Before Long”?

November 23, 2005 – At its November 1 policy meeting, the FOMC voted to raise its Fed funds target by 25 basis points to 4% – the twelfth straight 25 basis point increase (Chart 1).

Chart 1. The target Fed funds rate. January 2000 to date.

According to the minutes of that meeting (released yesterday), everyone on the FOMC agreed that a 4% Fed funds rate was still too low to meet their goal of establishing a neutral monetary policy. Further, everyone believed it “important” to continue to tighten “in order to check upside risks to inflation and to keep inflation expectations contained”.

Nevertheless, the minutes go on to hint that the FOMC may be nearing the end of its tightening program. Specifically, they warn that, “before long”, there will be some changes made to the longstanding boilerplate description of the monetary policy outlook used in the FOMC’s post-meeting policy statement.

The minutes also note that for future Fed funds hikes “policy setting would need to be increasingly sensitive to incoming economic data”. In other words, the FOMC has not yet determined its exact stopping point.

As far as the “incoming economic data” are concerned, the FOMC will be looking for signs that it may have overestimated or underestimated the neutral Fed funds rate.

The FOMC will also be using these data to reassess its choice of a neutral policy goal. In particular, given the FOMC’s current high level of concern about the economy’s upside inflation risks, a serious core inflation scare (excluding food and energy prices) would probably prompt the FOMC to tighten by more than the initial plan.

However, this didn’t seem to be the case when the FOMC met on November 1. The core inflation indicators remained within the FOMC’s tolerance range, and energy prices had begun to retreat from their September spike. Both of these trends have continued in the data released since then.

Bottom line: it won’t be over until it’s over. The best guess here remains the same: the FOMC will raise its Fed funds target to 4.75% (roughly neutral) by March 2006.[1]

Suzanne Rizzo