Yesterday’s minutes from March’s FOMC meeting as expected did not contain any surprises and as a result did not change the expectation for continued accommodative monetary policy. The minutes said ‘While generally acknowledging that the medium-term outlook for real GDP growth and employment had improved, participants continued to see the uncertainty surrounding that outlook as elevated. Participants agreed that the path of the economy would depend significantly on the course of the virus, including progress on vaccinations. Most participants indicated that the pandemic continued to pose considerable risks to the economic outlook, including risks associated with new more-contagious virus strains, obstacles in getting sufficient numbers of the public vaccinated, or social distancing fatigue’. Additionally, the minutes mentioned ‘Participants noted that it would likely be some time until substantial further progress toward the Committee’s maximum-employment and price-stability goals would be realized and that, consistent with the Committee’s outcome-based guidance, asset purchases would continue at least at the current pace until then’.
There was one particular passage though that did catch our eye. That was ‘Several participants commented that the factors that had contributed to low inflation during the previous expansion could again exert more downward pressure on inflation than expected’. This jumps out as it does align with our medium-term view on inflation. We have written many times about the underlying forces driving down inflation (demographics, automation etc) and in spite of the recent stimulus packages driving up inflation expectations, we believe the overall dynamics have not changed at all.
Only last month, Janet Yellen, the Treasury Secretary, also dismissed fears that Biden’s USD1.9tn pandemic-relief bill will lead to inflation. She stated that prior to the current crisis the unemployment rate in the US was about 3.5% and that there was ‘no sign of inflation increasing’. Yellen said that before the pandemic inflation was already ‘too low rather than too high’.