There was a lot of disagreement when the Federal Open Market Committee (FOMC) met last. The Federal Reserve (Fed) held an unscheduled meeting on March 4 (more below), but the bulk of the FOMC minutes were from the March 18–19 meeting.
Committee members generally agreed that there was some slack in the labor market, but there was a lot of disagreement about how much slack. Considering private-sector credit isn’t expanding—except in the student loan and auto loan categories—and unit labor costs aren’t growing, I think low inflation is here to stay even when there’s a lot less slack than there is now.
If the U.S. goes from excess capacity in the economy to running above capacity, that could be a good time to shift out of smaller-cap stocks into larger-cap stocks. It could also be a good time to shift from growth to value. At least, that’s historically what has tended to work well.
And the FOMC does care about what the markets think. There was discussion about whether credit spreads (the difference in yield between a corporate bond and a U.S. Treasury bond) were too narrow, whether margin debt (borrowed money to invest) was too high, and whether lending standards by banks were getting too lax. These concerns have been expressed regularly over the past few years, so it’s really nothing new. What’s also not new is that these concerns were expressed by a minority of the meeting participants. The majority of participants thought financial conditions were consistent with the Fed’s policy intentions.
The Fed is so intent on not disrupting financial conditions that it held an unscheduled conference call on March 4. The committee members anguished over how to change the Fed’s forward guidance. It was clear that the 6.5% unemployment rate threshold was becoming obsolete, so the March 4 meeting kicked off the official discussion about how the Fed’s language should change. The key was to make sure that whatever changes took place wouldn’t significantly alter the implied expectations of market participants. Many market indicators showed that investors were expecting the Fed to start raising rates in very gradual steps, commencing in 2015, and that’s how the FOMC wanted it to stay.
If there is one thing to learn from the minutes, it’s that the Fed doesn’t want to be unpredictable. It wants whatever it does to be well telegraphed and well known to avoid shocking the markets or the economy.