It's not just low inflation that is causing a mid-year readjustment at the Fed, but the realization that any economic initiatives which have President Trump as their face may never see the light of day.
It's clear from the minutes why the committee is using the middle of this year to shift attention to its massive balance sheet; the main factors which would drive a rate increase instead suggest that the committee is nearing or has reached the level at which it could lift rates with any sort of unity, or policy coherence. According to those minutes, released yesterday, the Fed's staff now does not see inflation reaching the central bank's 2% target any time next year (when all of this will likely be Gary Cohn's manure pie to eat), but rather in 2019. And yet with the improving labor market making one wing of policymakers justifiably nervous about overshooting their policy goals, moving ahead with the balance sheet reduction in the near-term is an easy and useful compromise that everyone on the committee, probably even Neel Kashkari, can approve.
There's another reason, buried quietly in the minutes, why the sudden rush to push rate expectations higher late last year and early this year has suddenly dissipated: the supposedly business and economy-friendly agenda of President Trump's administration is collapsing under the weight of the man's sheer lack of fitness for the job, his preferences for self-satisfaction over governing achievements.
Perhaps, because they had been accustomed to a different sort of style emanating from the Oval Office, Fed officials thought that Trump and a GOP-controlled Congress would push through a major stimulus package (something President Obama did in roughly one month with similar control of Congress), make a serious tax reform proposal, hell, even outlay a couple hundred billion for that beautiful, transparent wall that might start to flow into the corporate coffers or show up in the employment numbers in the Southwest region.
Instead, as the minutes demurely noted, several Fed officials said that "uncertainty about the course of federal government policy," were weighing on businesses' hiring and spending plans. Among those areas of uncertainty? Just fiscal policy, and international trade and, of course, health care. The minutes also note that Fed officials themselves are increasingly skeptical that the major fiscal stimulus they expected would probably be smaller than promised, or not be forthcoming any time soon enough to predicate policy decisions on it.
And all this was *before* the racist equivocation of the last few days which, among other things, officially severed his relationship with some of the largest and most prominent American corporations. *Before* he casually threatened to start a nuclear war in Southeast Asia, *before* he set his Twitter sights on Mitch McConnell. Was it even before the Mooch? Who can remember. If a material "pro-business" agenda is permanently stalled, though, it seems unlikely that policymakers will be looking to swiftly lift interest rates any time soon.
Of course quantifying economic progress, and economic risks, remains an imperfect science. But it may be that the Fed is entering a period in which, despite their stoic, stodgy efforts to steer clear of D.C.'s never-ending partisan wrangling, policymakers may have to more plainly describe the political risks and dysfunction that are part of their policy discussion.
Robb Soukup is a freelance journalist who previously covered the banking sector and The Fed for S&P Global Market Intelligence.