Fed shrugs off downturn concerns in latest minutes

Despite recent concerns among business leaders that the economy may enter a contraction some time in the next six months, U.S. central bankers see the economic outlook as fundamentally healthy.

The minutes of the latest meeting by the Fed’s interest rate-setting committee show bankers to be confident in the U.S. economic situation over the current time horizon.

“Most survey respondents did not appear to be concerned about an economic downturn in either the near or medium term,” the Fed’s September meeting minutes read.

Central bankers observed that views of financial market participants on the path of unemployment in the economy were pretty much in line with their own.

“The median dealer’s most likely path of the unemployment rate for the next few years was only modestly higher than that in the July survey and was roughly stable around current levels,” they noted.

Those conclusions grate against a recent survey of economic sentiment among top executives that found 61 percent of leaders expected a downturn within the next six months. Another survey from the National Federation of Independent Businesses (NFIB) released this week also showed a high degree of uncertainty about the economy from Main Street businesses.

Financial industry experts clocked the Fed’s overall confidence in the path of inflation and monetary policy.

“The Federal Reserve appears to remain comfortable with where inflation is and trending. Although inflation remains elevated, we do not see a material effect on the Fed’s trajectory of rate cuts. We will be particularly focused on the still elevated level of services inflation,” said Josh Hirt, senior U.S. economist for Vanguard, in a statement.

Fed officials noted that market volatility experienced over the summer caused by the monetary policy-sensitive “carry trade,” in which institutional investors borrow in cheaper currencies to invest in U.S. equities and other securities, had pretty much normalized.

“All told, the unwinding process was contained, and market functioning recovered relatively quickly,” the minutes read.

Fed officials have recently observed that economic conditions are in a solid place, with inflation close to the Fed’s 2 percent target and unemployment low in objective terms. There was some concern during the summer that a contractionary period had begun, but unemployment has ticked downward in its past two readings.

“If we want a soft landing, we can't be behind the curve,” Chicago Fed President Austan Goolsbee said in September. 

“Of course, getting the timing right at moments of transition is maybe the hardest challenge a central bank faces. It’s especially hard at a moment like this where conditions are so different from previous cycles. But knowing that labor markets tend to deteriorate quickly when they turn and that monetary policy takes time to act, it’s just not realistic to wait until problems show up,” he added.