According to the Fed’s September 2015 minutes, the key reasons behind policymakers’ decision not to raise rates were developments outside the US. The reason that these external factors played a key role in determining US monetary policy is that they portray a slowdown in the global economy, notably in China. A slowdown signals a decrease in demand for foreign goods, which could mean a fall in US exports. Exports have already been under pressure due to a strong US dollar. The dollar has also impacted revenues of large exporters like Colgate (CL), Honeywell International (HON), and IBM (IBM), among others.
A decrease in exports will further reduce the value of net exports (or exports minus imports), which is already negative. This will reduce the economic output of the nation. Thus, policymakers decided to wait and watch for further developments before taking action.
Economic indicators are good, but could be better
Economic growth, inflation, and unemployment figures indicate to policymakers that the US economy is good, but could be better. The September 2015 minutes had several good things to say about labor market metrics and economic growth. However, the US central bank was cautious and concerned about inflation.
Though projections for economic growth were revised up a bit for 2015, they were scaled down a notch for 2016. Policymakers were positive about the unemployment rate falling further in the future, but a few were concerned about the slack in the labor market.
However, things were different in regards to inflation. In June 2015, policymakers had projected that PCE (price consumption expenditure) inflation would reach the 2.0% level in 2017. However, in the September meeting, policymakers forecast that inflation wouldn’t reach that level until 2018. Projections for core PCE inflation were also revised downward.
In this series, we will look at a few key issues that the Fed’s September 2015 minutes highlighted. We’ll also analyze the implications of the minutes on diversified (AGTHX) and fixed income (BGNAX) mutual funds.
In the next article, we’ll look at how the financial markets reacted to the Fed’s September meeting minutes.