Highlights
The minutes of the December 13-14 FOMC meeting show Fed policymakers as prepared to keep on hiking rates until they are confident that inflation is moving sustainably lower towards the 2 percent flexible inflation target. The minutes also show that policymakers are not convinced by a couple of good months October and November and will need more data before they are persuaded monetary policy is sufficiently restrictive to tame inflation. Moreover, the update to their collective forecast in the summary of economic projections does not anticipate the work will be done any time soon.
The size and pace of rate hikes may be slower in 2023 and perhaps even pause, however, there is no indication that the FOMC anticipates rolling back any of the prior increases in the fed funds target rate range. While the FOMC agreed there had been"significant progress over the past year in moving toward a sufficiently restrictive stance of monetary policy," that work was not considered as done. In opting for a smaller 50 basis point increase at the December meeting,"Participants observed that a slowing in the pace of rate increases at this meeting would better allow the Committee to assess the economy's progress toward the Committee's goals of maximum employment and price stability, as monetary policy approached a stance that was sufficiently restrictive to achieve these goals."
While acknowledging the risks of tightening too much and triggering a recession, the upside risks for inflation and the need to avoid the costly mistake of stopping too soon were deemed less potentially damaging in the longer term. The minutes said,"Many participants highlighted that the Committee needed to continue to balance two risks. One risk was that an insufficiently restrictive monetary policy could cause inflation to remain above the Committee's target for longer than anticipated, leading to unanchored inflation expectations and eroding the purchasing power of households, especially for those already facing difficulty making ends meet. The other risk was that the lagged cumulative effect of policy tightening could end up being more restrictive than is necessary to bring down inflation to 2 percent and lead to an unnecessary reduction in economic activity, potentially placing the largest burdens on the most vulnerable groups of the population. Participants generally indicated that upside risks to the inflation outlook remained a key factor shaping the outlook for policy."
The minutes showed a more explicit concern about a recession. The inversion of the yield curve could be a recession signal. The minutes said,"A few participants remarked that the current configuration of nominal yields, with longer-term yields lower than shorter-term yields, had historically preceded recessions and hence bore watching. However, a couple of them also noted that the current inversion of the yield curve could reflect, in part, that investors expect the nominal policy rate to decline because of a fall in inflation over time."
The economic outlook remains highly uncertain in the FOMC's view. The minutes said,"Participants generally noted that the uncertainty associated with their economic outlooks was high and that the risks to the inflation outlook remained tilted to the upside. Participants cited the possibility that price pressures could prove to be more persistent than anticipated, due to, for example, the labor market staying tight for longer than anticipated. Participants saw a number of uncertainties surrounding the outlook for inflation stemming from factors abroad, such as China's relaxation of its zero-COVID policies, Russia's continuing war against Ukraine, and effects of synchronous policy firming by major central banks. A number of participants judged that the risks to the outlook for economic activity were weighted to the downside. They noted that sources of such risks included the potential for more persistent inflation inducing more restrictive policy responses, the prospect of unexpected negative shocks tipping the economy into a recession in an environment of subdued growth, and the possibility of households' and businesses' concerns about the outlook restraining their spending sufficiently to reduce aggregate output."
With such uncertainties and that these could contribute to keeping inflation up, the fight against inflation remains the priority."Participants reaffirmed their strong commitment to returning inflation" back to target, the minutes said.
The"very tight" labor market continues, at least in the data available at the time of the meeting. There were"tentative signs of labor market imbalances improving," the minutes noted. Policymakers' information suggests that businesses are reluctant to lose current workforces due to questions about being able to replace those workers later while the labor force remains below pre-pandemic levels. Although it is possible that the BLS data on nonfarm payroll growth may have overstated payroll gains in 2022, it does not change that the supply of labor is out of balance with current high demand. The minutes said,"Under an appropriately restrictive path of monetary policy, participants expected labor market supply and demand to come into better balance over time, easing upward pressures on nominal wages and prices."
Fed policymakers' outlook for future rate hikes is on a meeting-by-meeting basis. While more hikes are expected, at the moment these will be determined by future data reports that will help guide policymakers in determining the impact of past substantial rate increases before deciding just how big the next hike will be.
The size and pace of rate hikes may be slower in 2023 and perhaps even pause, however, there is no indication that the FOMC anticipates rolling back any of the prior increases in the fed funds target rate range. While the FOMC agreed there had been"significant progress over the past year in moving toward a sufficiently restrictive stance of monetary policy," that work was not considered as done. In opting for a smaller 50 basis point increase at the December meeting,"Participants observed that a slowing in the pace of rate increases at this meeting would better allow the Committee to assess the economy's progress toward the Committee's goals of maximum employment and price stability, as monetary policy approached a stance that was sufficiently restrictive to achieve these goals."
While acknowledging the risks of tightening too much and triggering a recession, the upside risks for inflation and the need to avoid the costly mistake of stopping too soon were deemed less potentially damaging in the longer term. The minutes said,"Many participants highlighted that the Committee needed to continue to balance two risks. One risk was that an insufficiently restrictive monetary policy could cause inflation to remain above the Committee's target for longer than anticipated, leading to unanchored inflation expectations and eroding the purchasing power of households, especially for those already facing difficulty making ends meet. The other risk was that the lagged cumulative effect of policy tightening could end up being more restrictive than is necessary to bring down inflation to 2 percent and lead to an unnecessary reduction in economic activity, potentially placing the largest burdens on the most vulnerable groups of the population. Participants generally indicated that upside risks to the inflation outlook remained a key factor shaping the outlook for policy."
The minutes showed a more explicit concern about a recession. The inversion of the yield curve could be a recession signal. The minutes said,"A few participants remarked that the current configuration of nominal yields, with longer-term yields lower than shorter-term yields, had historically preceded recessions and hence bore watching. However, a couple of them also noted that the current inversion of the yield curve could reflect, in part, that investors expect the nominal policy rate to decline because of a fall in inflation over time."
The economic outlook remains highly uncertain in the FOMC's view. The minutes said,"Participants generally noted that the uncertainty associated with their economic outlooks was high and that the risks to the inflation outlook remained tilted to the upside. Participants cited the possibility that price pressures could prove to be more persistent than anticipated, due to, for example, the labor market staying tight for longer than anticipated. Participants saw a number of uncertainties surrounding the outlook for inflation stemming from factors abroad, such as China's relaxation of its zero-COVID policies, Russia's continuing war against Ukraine, and effects of synchronous policy firming by major central banks. A number of participants judged that the risks to the outlook for economic activity were weighted to the downside. They noted that sources of such risks included the potential for more persistent inflation inducing more restrictive policy responses, the prospect of unexpected negative shocks tipping the economy into a recession in an environment of subdued growth, and the possibility of households' and businesses' concerns about the outlook restraining their spending sufficiently to reduce aggregate output."
With such uncertainties and that these could contribute to keeping inflation up, the fight against inflation remains the priority."Participants reaffirmed their strong commitment to returning inflation" back to target, the minutes said.
The"very tight" labor market continues, at least in the data available at the time of the meeting. There were"tentative signs of labor market imbalances improving," the minutes noted. Policymakers' information suggests that businesses are reluctant to lose current workforces due to questions about being able to replace those workers later while the labor force remains below pre-pandemic levels. Although it is possible that the BLS data on nonfarm payroll growth may have overstated payroll gains in 2022, it does not change that the supply of labor is out of balance with current high demand. The minutes said,"Under an appropriately restrictive path of monetary policy, participants expected labor market supply and demand to come into better balance over time, easing upward pressures on nominal wages and prices."
Fed policymakers' outlook for future rate hikes is on a meeting-by-meeting basis. While more hikes are expected, at the moment these will be determined by future data reports that will help guide policymakers in determining the impact of past substantial rate increases before deciding just how big the next hike will be.
Definition
Detailing the issues of debate and consensus among policymakers, the Federal Open Market Committee issues minutes of its latest meeting three weeks after the meeting.
Description
The FOMC has changed dramatically in the transparency of its operations. It now discloses policy changes at the end of each meeting. Historically, the Fed used to keep investors guessing about policy changes and Fed officials did not appear on the speaking circuit as frequently as they do now.
The Fed's minutes are a market mover as investors and analysts parse each word looking for clues to policy. The minutes include the complete economic analysis compiled by Fed officials and opinions at odds with the consensus.
Investors who want a more detailed description of Fed opinions will generally read the minutes closely. Fed officials also make numerous speeches, which give their views to the public at large.
The Fed's minutes are a market mover as investors and analysts parse each word looking for clues to policy. The minutes include the complete economic analysis compiled by Fed officials and opinions at odds with the consensus.
Investors who want a more detailed description of Fed opinions will generally read the minutes closely. Fed officials also make numerous speeches, which give their views to the public at large.
