Highlights
The minutes of the May 2-3 FOMC reflect conditions three weeks ago before the release of the April reports for employment, the CPI, and retail and food sales. The stresses in the banking industry remained, although improved and investor sentiment related to the banking system"stabilized"."Treasury market liquidity improved somewhat over the period but remained challenged. Treasury cash and futures markets continued to function in an orderly manner despite the lower-than-normal liquidity," the minutes noted.
The concerns related to increasing the federal debt ceiling were more distant. In light of the approximated June 1 date when the federal government would run out of borrowing options,"Yields on Treasury bills and coupon securities maturing in the first half of June increased notably amid significant volatility. The minutes said,"Many participants mentioned that it is essential that the debt limit be raised in a timely manner to avoid the risk of severely adverse dislocations in the financial system and the broader economy."
The minutes said the staff economic outlook for the US economy,"continued to assume that the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery. Real GDP was projected to decelerate over the next two quarters before declining modestly in both the fourth quarter of this year and the first quarter of next year."
Against this backdrop, FOMC participants agreed,"that the U.S. banking system was sound and resilient," but also said,"that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation." Current economic conditions included a modest increase in first quarter real GDP, a robust labor market with low unemployment, and elevated inflation. FOMC participants,"concurred that they remained highly attentive to inflation risks." The Committee said,"With inflation well above the Committee's longer-run 2 percent objective, and core inflation showing only some signs of moderation, participants expected that a period of below-trend growth in real GDP and some softening in labor market conditions would be needed to bring aggregate supply and aggregate demand into better balance and reduce inflationary pressures over time." The FOMC did forecast a recession, but risks to the downside dominated the outlook.
The minutes said,"Participants noted that risks associated with the recent banking stress had led them to raise their already high assessment of uncertainty around their economic outlooks. Participants judged that risks to the outlook for economic activity were weighted to the downside, although a few noted the risks were two sided."
After strong consumer spending in January, it tapered off in February and March. FOMC participants anticipate"that consumer spending would likely grow at a subdued rate over the remainder of 2023, reflecting in large part the effects of the tightening in financial conditions over the past year." Interest sensitive sectors are expected to feel the pinch the most. Business investment is also expected to be slower due to"relatively high borrowing costs, weak growth of business-sector output, and businesses' increasing concerns about the general economic outlook. Participants expected the tightening of bank lending standards to weigh further on firms' capital expenditures".
The strong labor market"would likely slow further, reflection a moderation in aggregate demand coming partly from tighter credit conditions.""Imbalances in the labor market" are expected to"gradually diminish, easing pressures on wages and prices."
Inflation continued to be deemed"unacceptably high" despite recent declines in inflation measures. Core inflation has been slower to improve than expected, the minutes said. Participants noted,"that core nonhousing services inflation had shown few signs of slowing in the past few months. Some participants remarked that a further easing in labor market conditions would be needed to help bring down inflation in this component." Housing inflation is anticipated to improve as the pace of rent increases eases.
There was no dissent among FOMC participants at the May 2-3 meeting about raising the fed funds rate by 25 basis points to 5.00-5.25 percent. Participants considered,"the degree and timing with which cumulative policy tightening restrained economic activity and reduced inflation, with some participants commenting that they saw evidence that the past years' tightening was beginning to have its intended effect. Another factor was the degree to which tighter credit conditions for households and businesses resulting from events in the banking sector would weigh on activity and reduce inflation, which participants agreed was very uncertain. Additional factors included the progress toward returning inflation to the Committee's longer-run goal of 2 percent, and the pace at which labor market conditions softened and economic growth slowed."
Sentiment regarding whether the time had some to pause in hiking rates was mixed. The minutes said,"Participants generally expressed uncertainty about how much more policy tightening may be appropriate. Many participants focused on the need to retain optionality after this meeting. Some participants commented that, based on their expectations that progress in returning inflation to 2 percent could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings. Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary."
The minutes also noted,"Some participants stressed that it was crucial to communicate that the language in the postmeeting statement should not be interpreted as signaling either that decreases in the target range are likely this year or that further increases in the target range had been ruled out." This confirms that the statement was not intended to signal a pause in the current rate cycle. The FOMC remains vigilant and data-dependent on future rate actions.
The concerns related to increasing the federal debt ceiling were more distant. In light of the approximated June 1 date when the federal government would run out of borrowing options,"Yields on Treasury bills and coupon securities maturing in the first half of June increased notably amid significant volatility. The minutes said,"Many participants mentioned that it is essential that the debt limit be raised in a timely manner to avoid the risk of severely adverse dislocations in the financial system and the broader economy."
The minutes said the staff economic outlook for the US economy,"continued to assume that the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery. Real GDP was projected to decelerate over the next two quarters before declining modestly in both the fourth quarter of this year and the first quarter of next year."
Against this backdrop, FOMC participants agreed,"that the U.S. banking system was sound and resilient," but also said,"that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation." Current economic conditions included a modest increase in first quarter real GDP, a robust labor market with low unemployment, and elevated inflation. FOMC participants,"concurred that they remained highly attentive to inflation risks." The Committee said,"With inflation well above the Committee's longer-run 2 percent objective, and core inflation showing only some signs of moderation, participants expected that a period of below-trend growth in real GDP and some softening in labor market conditions would be needed to bring aggregate supply and aggregate demand into better balance and reduce inflationary pressures over time." The FOMC did forecast a recession, but risks to the downside dominated the outlook.
The minutes said,"Participants noted that risks associated with the recent banking stress had led them to raise their already high assessment of uncertainty around their economic outlooks. Participants judged that risks to the outlook for economic activity were weighted to the downside, although a few noted the risks were two sided."
After strong consumer spending in January, it tapered off in February and March. FOMC participants anticipate"that consumer spending would likely grow at a subdued rate over the remainder of 2023, reflecting in large part the effects of the tightening in financial conditions over the past year." Interest sensitive sectors are expected to feel the pinch the most. Business investment is also expected to be slower due to"relatively high borrowing costs, weak growth of business-sector output, and businesses' increasing concerns about the general economic outlook. Participants expected the tightening of bank lending standards to weigh further on firms' capital expenditures".
The strong labor market"would likely slow further, reflection a moderation in aggregate demand coming partly from tighter credit conditions.""Imbalances in the labor market" are expected to"gradually diminish, easing pressures on wages and prices."
Inflation continued to be deemed"unacceptably high" despite recent declines in inflation measures. Core inflation has been slower to improve than expected, the minutes said. Participants noted,"that core nonhousing services inflation had shown few signs of slowing in the past few months. Some participants remarked that a further easing in labor market conditions would be needed to help bring down inflation in this component." Housing inflation is anticipated to improve as the pace of rent increases eases.
There was no dissent among FOMC participants at the May 2-3 meeting about raising the fed funds rate by 25 basis points to 5.00-5.25 percent. Participants considered,"the degree and timing with which cumulative policy tightening restrained economic activity and reduced inflation, with some participants commenting that they saw evidence that the past years' tightening was beginning to have its intended effect. Another factor was the degree to which tighter credit conditions for households and businesses resulting from events in the banking sector would weigh on activity and reduce inflation, which participants agreed was very uncertain. Additional factors included the progress toward returning inflation to the Committee's longer-run goal of 2 percent, and the pace at which labor market conditions softened and economic growth slowed."
Sentiment regarding whether the time had some to pause in hiking rates was mixed. The minutes said,"Participants generally expressed uncertainty about how much more policy tightening may be appropriate. Many participants focused on the need to retain optionality after this meeting. Some participants commented that, based on their expectations that progress in returning inflation to 2 percent could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings. Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary."
The minutes also noted,"Some participants stressed that it was crucial to communicate that the language in the postmeeting statement should not be interpreted as signaling either that decreases in the target range are likely this year or that further increases in the target range had been ruled out." This confirms that the statement was not intended to signal a pause in the current rate cycle. The FOMC remains vigilant and data-dependent on future rate actions.
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.
