FOMC Minutes Excerpt: Assessing Likelihood Low Infl Is Transitory>

--Some Voters Say Will Be Assessing Infl Trajectory Ahead of Next Hike 

--Several Particip Say Hike Depends on Their Confidence on Infl

--A Few Particip Need To See Data Confirming Infl Moving Higher

     WASHINGTON (MNI) - The following is an excerpt of the Federal Open 

Market Committee minutes describing committee's policy action, 

published Wednesday for the Sept. 19-20 meeting: 

     Some members emphasized that, in considering the timing of further 

adjustments in the federal funds rate, they would be evaluating incoming 

information to assess the likelihood that recent low readings on 

inflation were transitory and that inflation was again on a trajectory 

consistent with achieving the Committees 2 percent objective over the 

medium term. 

**

     With the medium-term outlook little changed, inflation below 2 

percent, and the neutral rate of interest estimated to be quite low, all 

participants thought it would be appropriate for the Committee to 

maintain the current target range for the federal funds rate at this 

meeting, and nearly all supported again indicating in the postmeeting 

statement that a gradual approach to increasing the federal funds rate 

will likely be warranted. Nevertheless, many participants expressed 

concern that the low inflation readings this year might reflect not only 

transitory factors, but also the influence of developments that could 

prove more persistent, and it was noted that some patience in removing 

policy accommodation while assessing trends in inflation was warranted. 

A few of these participants thought that no further increases in the 

federal funds rate were called for in the near term or that the upward 

trajectory of the federal funds rate might appropriately be quite 

shallow. Some other participants, however, were more worried about 

upside risks to inflation arising from a labor market that had already 

reached full employment and was projected to tighten further. Their 

concerns were heightened by the apparent easing in financial conditions 

that had developed since the Committees policy normalization process 

was initiated in December 2015. These participants cautioned that an 

unduly slow pace in removing policy accommodation could result in an 

overshoot of the Committees inflation objective in the medium term that 

would likely be costly to reverse or could lead to an intensification of 

financial stability risks or to other imbalances that might prove 

difficult to unwind. 

     Consistent with the expectation that a gradual rise in the federal 

funds rate would be appropriate, many participants thought that another 

increase in the target range later this year was likely to be warranted 

if the medium-term outlook remained broadly unchanged. Several others 

noted that, in light of the uncertainty around their outlook for 

inflation, their decision on whether to take such a policy action would 

depend importantly on whether the economic data in coming months 

increased their confidence that inflation was moving up toward the 

Committees objective. A few participants thought that additional 

increases in the federal funds rate should be deferred until incoming 

information confirmed that the low readings on inflation this year were 

not likely to persist and that inflation was clearly on a path toward 

the Committees symmetric 2 percent objective over the medium term. All 

agreed that they would closely monitor and assess incoming data before 

making any further adjustment to the federal funds rate. 

** 

     Based on the available data, PCE price inflation over the 12 months 

ending in August was estimated to be about 1 percent, remaining below 

the Committees longer-run objective. In their review of the recent data 

and the outlook for inflation, participants discussed a number of 

factors that could be contributing to the low readings on consumer 

prices this year and weighed the extent to which those factors might be 

transitory or could prove more persistent. Many participants continued 

to believe that the cyclical pressures associated with a tightening 

labor market or an economy operating above its potential were likely to 

show through to higher inflation over the medium term. In addition, many 

judged that at least part of the softening in inflation this year was 

the result of idiosyncratic or one-time factors, and, thus, their 

effects were likely to fade over time. However, other developments, such 

as the effects of earlier changes to government health-care programs 

that had been holding down health-care costs, might continue to do so 

for some time. Some participants discussed the possibility that secular 

trends, such as the influence of technological innovations on 

competition and business pricing, also might have been muting 

inflationary pressures and could be intensifying. It was noted that 

other advanced economies were also experiencing low inflation, which 

might suggest that common global factors could be contributing to 

persistence of below-target inflation in the United States and abroad. 

Several participants commented on the importance of longer-run inflation 

expectations to the outlook for a return of inflation to 2 percent. A 

number of indicators of inflation expectations, including survey 

statistics and estimates derived from financial market data, were 

generally viewed as indicating that longer-run inflation expectations 

remained reasonably stable, although a few participants saw some of 

these measures as low or slipping. 

     Participants raised a number of important considerations about the 

implications of persistently low inflation for the path of the federal 

funds rate over the medium run. Several expressed concern that the 

persistence of low rates of inflation might imply that the underlying 

trend was running below 2 percent, risking a decline in inflation 

expectations. If so, the appropriate policy path should take into 

account the need to bolster inflation expectations in order to ensure 

that inflation returned to 2 percent and to prevent erosion in the 

credibility of the Committees objective. It was also noted that the 

persistence of low inflation might result in the federal funds rate 

staying uncomfortably close to its effective lower bound. However, a few 

others pointed out the need to consider the lags in the response of 

inflation to tightening resource utilization and, thus, increasing 

upside risks to inflation as the labor market tightened further. 

     On balance, participants continued to forecast that PCE price 

inflation would stabilize around the Committees 2 percent objective 

over the medium term. However, several noted that in preparing their 

projections for this meeting, they had taken on board the likelihood 

that convergence to the Committees symmetric 2 percent inflation 

objective might take somewhat longer than they anticipated earlier. 

Participants generally agreed it would be important to monitor inflation 

developments closely. Several of them noted that interpreting the next 

few inflation reports would likely be complicated by the temporary 

run-up in energy costs and in the prices of other items affected by 

storm-related disruptions and rebuilding. 

--MNI Washington Bureau; tel: +1 202-371-2121; email: 

jean.yung@marketnews.com 

[TOPICS: MMUFE$,M$U$$$]