Just as few were surprised when the Federal Reserve announced the first increase in the target range for the federal funds rate in the statement following the December meeting, there were few surprises in the more detailed minutes of the meeting, released three weeks later.
The minutes reiterated the basic themes that have guided deliberations in recent months: accumulated improvements in economic growth and labor market conditions have been substantial, confidence that inflation will return to the two percent objective over the medium term is broad based, and the path of subsequent rate increases will be gradual. The anticipated gradual pace of future increases implies that monetary policy will remain accommodative, and the lags between policy actions and effects warrant an earlier move rather than risk falling behind the inflation curve and needing more abrupt tightening later.
One surprise was on the part of meeting participants; the surprising persistence of continuing declines in oil and commodity prices. Headline inflation measures have been held down by collapsing energy prices, but the Fed’s preferred measure, the core (excluding food and energy) price index for personal consumption expenditures (PCE) has been steady at 1.3% all year. The persistence of the “transitory” nature of the downward pressure on inflation has been a concern for some committee members. The uncertainty surrounding the inflation environment made the decision to raise interest a close call for some.