*(US) FED MEETING MINUTES OF THE JULY 29-30 FOMC MEETING:
Felt labor market improvement had been faster than expected, conditions noticeably closer to normal
- Labor market conditions improved in recent months according to participants' reports on developments in their Districts as well as a range of national indicators.
The improvement was reflected not only in a pickup in payroll employment gains and a noticeable decline in the overall unemployment rate, but also in reductions in broader measures of under-utilization such as long-duration joblessness and the number of workers with part-time jobs who would prefer full-time employment.
The labor force participation rate was stable, and a couple of participants pointed out that the transition rate from long-duration unemployment to employment had moved up. Moreover, some participants cited positive signs of increased hiring and turnover in the labor market, including increases in job openings and hiring plans, higher quit rates, and apparent improvements in matching workers and jobs.
Participants generally agreed that both the recent improvement in labor market conditions and the cumulative progress over the past year had been greater than anticipated and that labor market conditions had moved noticeably closer to those viewed as normal in the longer run. Participants differed, however, in their assessments of the remaining degree of labor market slack and how to measure it.
- Most participants supported reducing or ending re-investment sometime after the first increase in the target range for the federal funds rate. A few, however, believed that ceasing reinvestment before liftoff was a better approach because it would lead to an earlier reduction in the size of the portfolio.
Most participants continued to anticipate that the Committee would not sell MBS, except perhaps to eliminate residual holdings. However, a couple of participants preferred to sell MBS in order to unwind the effect of the Federal Reserve's holdings on mortgage rates relative to other interest rates more rapidly than would occur as a result of repayments of principal alone. Some others noted that, given the uncertainties attending the normalization process and the outlook for the economy and financial markets, it could be helpful to retain the option to sell some assets.
- Economic activity rebounded in the second quarter. Household spending appeared to be rising moderately, and business fixed investment was advancing, while the recovery in the housing sector remained slow. Fiscal policy was restraining economic growth, al-though the extent of the restraint was diminishing. The Committee expected that, with appropriate policy accommodation, economic activity would expand at a moderate pace with labor market indicators and inflation moving toward levels that the Committee judges consistent with its dual mandate.
- Members discussed their assessments of progress--both realized and expected--toward the Committee's objectives of maximum employment and 2 percent inflation and considered enhancements to the statement language that would more clearly communicate the Committee's view on such progress. Regarding the labor market, many members concluded that a range of indicators of labor market conditions--including the unemployment rate as well as a number of other measures of labor utilization--had improved more in recent months than they anticipated earlier.
They judged it appropriate to replace the description of recent labor market conditions that mentioned solely the unemployment rate with a description of their assessment of the remaining underutilization of labor resources based on their evaluation of a range of labor market indicators. In their discussion, some members expressed reservations about describing the extent of underutilization in labor resources more broadly. In particular, they worried that the degree of labor market slack was difficult to characterize succinctly and that the statement language might prove difficult to adjust as labor market conditions continued to improve. Moreover, they were concerned that, despite the improvement in labor market conditions, the new language might be misinterpreted as indicating increased concern about underutilization of labor resources.
At the conclusion of the discussion, the Committee agreed to state that labor market conditions had improved, with the unemployment rate declining further, while also stating that a range of labor market indicators suggested that there remained significant underutilization of labor resources. Many members noted, however, that the characterization of labor market underutilization might have to change before long, particularly if progress in the labor market continued to be faster than anticipated. Regarding inflation, members agreed to update the language in the statement to acknowledge that inflation had recently moved somewhat closer to the Committee's longer-run objective and to convey their judgment that the likelihood of inflation running persistently below 2 percent had diminished somewhat.
- Many participants continued to attribute the subdued rise in wages to the remaining slack in the labor market; it was noted that the elevated level of relatively low-paid part-time workers was holding down overall wage increases. Several other participants pointed to reports that wage pressures had increased in some regions and occupations that were experiencing labor shortages or relatively low unemployment. However, a couple of participants indicated that the pass-through of labor costs has been more attenuated since the mid-1980s and that wage pressures might not be a reliable leading indicator of higher inflation.
- One member, however, objected to the guidance that it would likely be appropriate to maintain the current range for the federal funds rate for a considerable time after the asset purchase program ends because it was time dependent and did not recognize the implications for monetary policy of the considerable progress that had been made toward the Committee's goals.