Highlights
The minutes of the March 21-22 FOMC encompassed the turmoil in the banking sector taking place early in March, but without meaningfully changing the trajectory of monetary policy as seen by the Committee three weeks ago.
The manager of open market operations at the New York Fed reported at the time:"Treasury market liquidity was poor and implied volatility was high, but the market remained functional amid substantial trading activity. Higher Treasury market volatility contributed to wider spreads for household and business borrowing." It was also noted that,"Financial conditions tightened considerably over the intermeeting period as a whole."
Inflationary conditions as seen in the"market-based measures of inflation compensation over shorter horizons rose over the period, although compensation retraced a good portion of its increase later in the period as markets reacted to the developments in the banking sector. Forward inflation compensation measures continued to indicate that longer-term inflation expectations remained well anchored."
Market surveys of the outlook for monetary policy anticipated the fed funds rate would"peak in May 2023 and the target range would then move lower," but likely not before the end of the year. The summary of economic projections of FOMC participants also pointed to no change in rates before the end of 2023.
During the disruptions in the banking sector,"Borrowing from the new Bank Term Funding Program had been small relative to discount window borrowing, which had increased to record levels. Use of the overnight reverse repurchase agreement (ON RRP) facility fell, especially for money market mutual funds (MMFs), as the supply of short-term securities at attractive rates increased."
At the time of the meeting, FOMC participants' views on the economy said,"In their discussion of current economic conditions, participants noted that recent indicators pointed to modest growth in spending and production. At the same time, though, participants noted that job gains had picked up in recent months and were running at a robust pace; the unemployment rate had remained low. Inflation remained elevated. Participants agreed that the U.S. banking system remained sound and resilient. They commented that recent developments in the banking sector were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. Participants agreed that the extent of these effects was uncertain."
The Committee reiterated that it remained,"highly attentive to inflation risks." With the data through mid-March broadly"stronger than expected", participants were more upbeat on the outlook for the US economy in 2023. The minutes said,"Based on incoming economic data, participants' assessments of the effects of cumulative policy firming, and their initial views on the likely economic effect of the recent banking-sector developments, participants generally expected real GDP to grow this year at a pace well below its long-run trend rate." The update to the summary of economic projects had an unrevised longer-run forecast of up 1.8 percent.
However, the recent stresses in banking and finance meant that there was"significant uncertainty as to how those conditions would evolve." In any case, at that time the fallout seemed contained by the actions taken to stabilize the international banking system.
Policymakers"agreed that the labor market remained very tight," and that there were"some signs of improvement in the imbalances between demand and supply in the labor market." Nonetheless,"Several participants pointed out that wage growth was still well above the rates that would be consistent over the longer run with the 2 percent inflation objective, given current estimates of trend productivity growth. Participants expected that, under appropriate monetary policy, supply and demand conditions in the labor market will come into better balance over time, easing upward pressures on wages and prices."
As to price inflation,"participants agreed that inflation was unacceptably high, and that progress on disinflation was"slower-than-expected". In particular,"Regarding prices for core services excluding housing, participants agreed that there was little evidence pointing to disinflation in this component". Risks to the economic outlook were"weighted to the downside" and inflation"weighted to the upside" although possible reductions in credit supply could offset some of the inflation risk.
In the end, all participants agreed on the 25 basis point rate hike to 4.75-5.00 percent."Several participants" considered whether it would be appropriate to leave rates unchanged to"allow more time to assess the financial and economic effects of recent banking-sector developments and of the cumulative tightening of monetary policy." But actions to address the disruptions the Fed and other government agencies had calmed markets sufficiently to relieve those concerns."Some participants" discussed a 50 basis point hike, but were dissuaded by the potential for tighter financial conditions that might result from developments in the banking sector.
For the intermeeting period before the May 2-3 meeting, participants planned to pay close attention to"incoming information regarding changes in credit conditions and credit flows as well as broader changes in financial conditions and to assess the implications for economic activity, labor markets, and inflation. Several participants emphasized the need to retain flexibility and optionality in determining the appropriate stance of monetary policy given the highly uncertain economic outlook."
Since this meeting, the economic data point to some easing in labor market tightness and relief on the inflation front.
The manager of open market operations at the New York Fed reported at the time:"Treasury market liquidity was poor and implied volatility was high, but the market remained functional amid substantial trading activity. Higher Treasury market volatility contributed to wider spreads for household and business borrowing." It was also noted that,"Financial conditions tightened considerably over the intermeeting period as a whole."
Inflationary conditions as seen in the"market-based measures of inflation compensation over shorter horizons rose over the period, although compensation retraced a good portion of its increase later in the period as markets reacted to the developments in the banking sector. Forward inflation compensation measures continued to indicate that longer-term inflation expectations remained well anchored."
Market surveys of the outlook for monetary policy anticipated the fed funds rate would"peak in May 2023 and the target range would then move lower," but likely not before the end of the year. The summary of economic projections of FOMC participants also pointed to no change in rates before the end of 2023.
During the disruptions in the banking sector,"Borrowing from the new Bank Term Funding Program had been small relative to discount window borrowing, which had increased to record levels. Use of the overnight reverse repurchase agreement (ON RRP) facility fell, especially for money market mutual funds (MMFs), as the supply of short-term securities at attractive rates increased."
At the time of the meeting, FOMC participants' views on the economy said,"In their discussion of current economic conditions, participants noted that recent indicators pointed to modest growth in spending and production. At the same time, though, participants noted that job gains had picked up in recent months and were running at a robust pace; the unemployment rate had remained low. Inflation remained elevated. Participants agreed that the U.S. banking system remained sound and resilient. They commented that recent developments in the banking sector were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. Participants agreed that the extent of these effects was uncertain."
The Committee reiterated that it remained,"highly attentive to inflation risks." With the data through mid-March broadly"stronger than expected", participants were more upbeat on the outlook for the US economy in 2023. The minutes said,"Based on incoming economic data, participants' assessments of the effects of cumulative policy firming, and their initial views on the likely economic effect of the recent banking-sector developments, participants generally expected real GDP to grow this year at a pace well below its long-run trend rate." The update to the summary of economic projects had an unrevised longer-run forecast of up 1.8 percent.
However, the recent stresses in banking and finance meant that there was"significant uncertainty as to how those conditions would evolve." In any case, at that time the fallout seemed contained by the actions taken to stabilize the international banking system.
Policymakers"agreed that the labor market remained very tight," and that there were"some signs of improvement in the imbalances between demand and supply in the labor market." Nonetheless,"Several participants pointed out that wage growth was still well above the rates that would be consistent over the longer run with the 2 percent inflation objective, given current estimates of trend productivity growth. Participants expected that, under appropriate monetary policy, supply and demand conditions in the labor market will come into better balance over time, easing upward pressures on wages and prices."
As to price inflation,"participants agreed that inflation was unacceptably high, and that progress on disinflation was"slower-than-expected". In particular,"Regarding prices for core services excluding housing, participants agreed that there was little evidence pointing to disinflation in this component". Risks to the economic outlook were"weighted to the downside" and inflation"weighted to the upside" although possible reductions in credit supply could offset some of the inflation risk.
In the end, all participants agreed on the 25 basis point rate hike to 4.75-5.00 percent."Several participants" considered whether it would be appropriate to leave rates unchanged to"allow more time to assess the financial and economic effects of recent banking-sector developments and of the cumulative tightening of monetary policy." But actions to address the disruptions the Fed and other government agencies had calmed markets sufficiently to relieve those concerns."Some participants" discussed a 50 basis point hike, but were dissuaded by the potential for tighter financial conditions that might result from developments in the banking sector.
For the intermeeting period before the May 2-3 meeting, participants planned to pay close attention to"incoming information regarding changes in credit conditions and credit flows as well as broader changes in financial conditions and to assess the implications for economic activity, labor markets, and inflation. Several participants emphasized the need to retain flexibility and optionality in determining the appropriate stance of monetary policy given the highly uncertain economic outlook."
Since this meeting, the economic data point to some easing in labor market tightness and relief on the inflation front.
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.
