Highlights
The minutes of the July 25-26 FOMC meeting reflect a resilient US economy and financial sector. As of the FOMC deliberations three weeks ago, growth has been stronger than expected. Stress in the banking sector appears well contained. The labor market is deemed"very tight" in the minutes with imbalances in labor supply and demand gradually coming back into balance. Inflation measures are moving in the right direction towards the Fed's 2 percent objective, if not enough to satisfy policymakers who are united in ensuring that inflation does return sustainably to the objective. Inflation expectations are firmly anchored.
Chair Jerome Powell said at his press briefing on July 26 that the staff forecast no longer looks for a mild recession in 2023. The minutes added that,"the staff continued to expect that real GDP growth in 2024 and 2025 would run below their estimate of potential output growth, leading to a small increase in the unemployment rate relative to its current level."
FOMC participants agree with this. The minutes said,"Participants continued to view a period of below-trend growth in real GDP and some softening in labor market conditions as needed to bring aggregate supply and aggregate demand into better balance and reduce inflation pressures sufficiently to return inflation to 2 percent over time."
Inflation remains the present focus of in the FOMC's efforts to meet the dual mandate. Labor market indicators are"very tight but pointed to signs that demand and supply were coming into better balance". Participants noted,"evidence that labor demand was easing-including declines in job openings, lower quits rates, more part-time work, slower growth in hours worked, higher unemployment insurance claims, and more moderate rates of nominal wage growth."
On the other hand,"Participants cited a number of tentative signs that inflation pressures could be abating. These signs included some softening in core goods prices, lower online prices, evidence that firms were raising prices by smaller amounts than previously, slower increases in shelter prices, and recent declines in survey estimates of shorter-term inflation expectations and of inflation uncertainty."
Not all FOMC participants are satisfied with progress on inflation and"several participants commented that significant disinflationary pressures had yet to become apparent in the prices of core services excluding housing". Further,"notwithstanding recent favorable developments, inflation remained well above the Committee's" objective and"elevated inflation was continuing to harm businesses and households-low-income families in particular". Also, there remains a"high degree of uncertainty regarding the cumulative effects on the economy of past monetary policy tightening."
The minutes said,"In discussing downside risks to economic activity and inflation, participants considered the possibility that the cumulative tightening of monetary policy could lead to a sharper slowdown in the economy than expected, as well as the possibility that the effects of the tightening of bank credit conditions could prove more substantial than anticipated".
In the conditions prevailing at the time of the meeting,"Almost all participants judged it appropriate to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent at this meeting". There is a hint that one or two participants were not in favor of another rate hike at the time. However,"most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy". All the FOMC voters were in favor of the hike.
In assessing the risks of another rate hike at the July meeting,"A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee's goals had become more two sided, and it was important that the Committee's decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening." On net, Fed policymakers appear to think that the risks of easing up on restrictive monetary policy too soon is preferable to keeping the fed funds target rate range higher for a little too long.
Chair Jerome Powell said at his press briefing on July 26 that the staff forecast no longer looks for a mild recession in 2023. The minutes added that,"the staff continued to expect that real GDP growth in 2024 and 2025 would run below their estimate of potential output growth, leading to a small increase in the unemployment rate relative to its current level."
FOMC participants agree with this. The minutes said,"Participants continued to view a period of below-trend growth in real GDP and some softening in labor market conditions as needed to bring aggregate supply and aggregate demand into better balance and reduce inflation pressures sufficiently to return inflation to 2 percent over time."
Inflation remains the present focus of in the FOMC's efforts to meet the dual mandate. Labor market indicators are"very tight but pointed to signs that demand and supply were coming into better balance". Participants noted,"evidence that labor demand was easing-including declines in job openings, lower quits rates, more part-time work, slower growth in hours worked, higher unemployment insurance claims, and more moderate rates of nominal wage growth."
On the other hand,"Participants cited a number of tentative signs that inflation pressures could be abating. These signs included some softening in core goods prices, lower online prices, evidence that firms were raising prices by smaller amounts than previously, slower increases in shelter prices, and recent declines in survey estimates of shorter-term inflation expectations and of inflation uncertainty."
Not all FOMC participants are satisfied with progress on inflation and"several participants commented that significant disinflationary pressures had yet to become apparent in the prices of core services excluding housing". Further,"notwithstanding recent favorable developments, inflation remained well above the Committee's" objective and"elevated inflation was continuing to harm businesses and households-low-income families in particular". Also, there remains a"high degree of uncertainty regarding the cumulative effects on the economy of past monetary policy tightening."
The minutes said,"In discussing downside risks to economic activity and inflation, participants considered the possibility that the cumulative tightening of monetary policy could lead to a sharper slowdown in the economy than expected, as well as the possibility that the effects of the tightening of bank credit conditions could prove more substantial than anticipated".
In the conditions prevailing at the time of the meeting,"Almost all participants judged it appropriate to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent at this meeting". There is a hint that one or two participants were not in favor of another rate hike at the time. However,"most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy". All the FOMC voters were in favor of the hike.
In assessing the risks of another rate hike at the July meeting,"A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee's goals had become more two sided, and it was important that the Committee's decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening." On net, Fed policymakers appear to think that the risks of easing up on restrictive monetary policy too soon is preferable to keeping the fed funds target rate range higher for a little too long.
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.
