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FOMC Minutes



Below are some excerpts from the FOMC minutes that I think are particularly important to the ongoing debate about inflation, stagflation, deflation.

"Recent information suggested that price inflation might be picking up slightly and only partly as a direct result of increases in energy prices...While the rise in core consumer prices over the[last] twelve months was the same as the change in the year-earlier twelve-month period, core consumer price inflation was up slightly...compared with other recent months."

Incredibly, despite the fact that CPI hasn't risen much on a y/y basis, the Fed is still worried about it.

"At its [last] meeting, the Committee adopted a directive that called increase of ¼ percentage point in the federal funds rate. The members saw substantial risks...of higher inflation, and they agreed that the tightening action would help bring the growth of aggregate demand into better alignment with the sustainable expansion of aggregate supply. They also noted that even with this additional firming the risks were still weighted mainly in the direction of rising inflation pressures and that more tightening might be needed."

Because the Fed knows exactly how much the U.S. economy can grow its supply of goods and services, it wants to temper the demand side so that the two don't get out of balance. Uh-huh.

"...the growth of spending on consumer durables and houses was expected to slow; in contrast, however, overall business investment in equipment and software was projected to remain robust, partly because of the upward trend in replacement demand, especially for computers and software. In addition, continued solid economic growth abroad was expected to boost the growth of U.S. exports for some period ahead. Core price inflation was projected to rise noticeably over the forecast horizon."

Consumer spending set to slow but business capex set to expand thanks to the fact that the technology replacement cycle is set to kick in.

"In the absence of further monetary restraint, any slowing over coming quarters was not viewed as likely to be sufficient to avert increasing pressures on the economy's already strained resources and rising inflation rates that would undermine the economy's remarkable performance. Adding to concerns about heightened inflation pressures was statistical and anecdotal evidence that could be read as suggesting that underlying inflation already was beginning to pick up."

Without increasing rates again, the Fed believes that inflation will get out of control. Further, again even though actual inflation statistics are benign, some anecdotal evidence suggests that actual inflation is even higher already and posed to get worse in the coming months.

Ooops. Forgot to mention, the above FOMC minutes were from the May 16th 2000 meeting. And over the next 18 months from this release CPI dropped from 3.1% to 1.1%, the biggest % drop in 20 years; GDP declined from 4.1% y/y growth to 0.2% y/y growth; and, well, you already know what happened to capex spending generally and technology spending specifically.

The Federal Reserve is no different than any other government entity: they do not lead trends, they lag them. In fact, as most government agencies do, they are often the last to fully appreciate a trend that is already underway. This is why the above FOMC minutes ring so hollow in the light of history. They missed inflation, economic growth, and demand by a mile.

And it is why the current set of FOMC minutes will likely ring so hollow as well in 12-24 months.

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