Here are comments from Danske Bank on the Federal Reserve's FOMC Decem Minutes, distilled to 9 'key points.
1- Development in the labour market is key to understanding why the Fed increased the Fed funds rate target:'almost all participants agreed that the improvements that had occurred in the labour market and their confidence in a return of inflation to 2^ over the medium term now satisfied the Committee's criteria for beginning the policy normalisation process'.
2- A number of members have noticed that wage inflation has begun to increase, probably due to the tighter labour market:'A number of participants observed that wage increases had begun to pick up, or that they appeared likely to do so over the coming year.'
3- Most FOMC members think higher wage inflation will feed into core inflation over the forecast horizon:'with margins of resource underutilisation having already diminished appreciably...most anticipated that tightening resource utilisation over the next year would contribute to higher inflation'.
4- The Fed wants to see PCE core inflation picking up. 'In the meanwhile, it can monitor how the tighter monetary policy affects the real economy:it would probably take some time for the data to confirm that inflation was on a trajectory to return to 2% over the medium term. Gradual adjustments in the federal funds rate would also allow policymakers to assess how the economy was responding to increases in interest rates.'
5- In particular, the subdued PCE core inflation is a concern for some FOMC members: 'for some members, the risks attending their inflation forecasts remained considerable...In view of these risks and the shortfall of inflation from 2%, members expressed their intention to carefully monitor actual and expected progress toward the Committee's inflation goal.'
6- The FOMC is less worried about the economic outlook abroad and financial conditions.'Participants generally saw the downside risks to US economic activity from global economic and financial developments, although still material, as having diminished since late summer.'
7- Lower inflation expectations have become a small concern for some FOMC members. 'Many concluded that longer run inflation expectations remained reasonably stable. However, some expressed concerns that inflation expectations may have already moved lower, or that they might do so if inflation persisted for much longer at a rate below the Committee's objective.'
8- FOMC members are not that worried about the development in the high-yield market just before the meeting:'several participants commented that markets for leveraged finance had been correcting since mid-year - particularly for the most risky assets, including those associated with energy firms - and noted that the widening of credit spreads in corporate bond markets appeared to be largely due to the repricing of riskier assets.'
9- Minutes underline once again that the hiking cycle will be gradual and data dependent:'the appropriate path for the federal funds rate would depend on the economic outlook as informed by incoming data. Members stressed the potential need to accelerate or slow the pace of normalisation as the economic outlook evolved.'
