Highlights
The minutes of the April 30-May FOMC meeting show that three weeks ago, the bottom line for the outlook for monetary policy was the sideways move for inflation indicators over the course of the first quarter 2024 while the US economy continued to outperform expectations.
Market expectations at the time of the meeting were lowered to a single rate cut sometime later this year. The US dollar strengthened in the intermeeting period before the FOMC. Markets were well prepared for the announcement of the slowing in balance sheet normalization from the minutes of the March 19-20 meeting and Chair Jerome Powell's remarks. Fed policymakers were also able to"decouple" the change in balance sheet policy from interest rate policy, and manage anticipation of the future size of the Fed's reserve bank holdings as no higher than previously thought. For the present, the supply of reserves remains"abundant" as the Fed works to return the size of the balance sheet to something considered"ample" as was the case prior to the pandemic.
Fed participants took note that,"The recent monthly data had showed significant increases in components of both goods and services price inflation. In particular, inflation for core services excluding housing had moved up in the first quarter compared with the fourth quarter of last year, and prices of core goods posted their first three-month increase in several months. In addition, housing services inflation had slowed less than had been anticipated based on the smaller increases in measures of market rents over the past year." Further,"some participants emphasized that the recent increases in inflation had been relatively broad based and therefore should not be overly discounted," the minutes said.
The minutes reiterated that the FOMC remains"highly attentive to inflation risks." The first quarter 2024 inflation data,"had not increased their confidence in progress toward 2 percent and, accordingly, had suggested that the disinflation process would likely take longer than previously thought."
In the meantime, the minutes said that"demand and supply in the labor market, on net, were continuing to come into better balance, though at a slower rate." The labor market remains"tight" as of three weeks ago, although the FOMC did not have the April employment report at the time of the meeting. Labor market data since the FOMC meeting suggests that hiring has slowed while job losses have not accelerated. Overall labor market conditions are probably much the same as at the time of the meeting. If the balance in the labor market has improved,"many" FOMC participants noted"an easing of nominal wage pressures". However,"a number" of participants pointed out that the costs of labor continue to rise, and"a couple" said that"negotiated compensation agreements had added to wage pressures in their Districts."
With economic activity at a"solid pace" in the first quarter, albeit more moderate than in the second half of 2023, FOMC participants anticipate"that GDP growth would slow from last year's strong pace."
The FOMC discussed financial stability and"noted vulnerabilities to the financial system that they assessed warranted monitoring." They mentioned,"unrealized losses on assets resulting from the rise in longer-term yields, high CRE exposure, significant reliance by some banks on uninsured deposits, cyber threats, or increased financial interconnections among banks." Around the end of the bank term funding program in March, the Fed indicated that it anticipated using the discount window as its primary tool for liquidity in a crisis."A couple of participants commented that the Federal Reserve should continue to improve the operational efficiency of the discount window," the minutes said. The minutes continued,"Participants generally noted that high interest rates could contribute to vulnerabilities in the financial system. In that context, a number of participants emphasized that monetary policy should be guided by the outlook for employment and inflation and that other tools should be the primary means to address financial stability risks."
The decision to slow the runoff in the balance sheet was not unanimous."Almost all" FOMC participants favored it, while"a few" would have continued at the current pace or slightly higher". The slowing is intended to"facilitate a smooth transition from abundant to ample reserve balances by reducing the likelihood that money markets experience undue stress that could require an early end to runoff." The decision to lower the cap for US treasuries only was deemed in line with the intention to hold primarily US treasuries, while the cap for agency and agency MBS holdings is rarely met in any one month and in no need of adjustment.
Market expectations at the time of the meeting were lowered to a single rate cut sometime later this year. The US dollar strengthened in the intermeeting period before the FOMC. Markets were well prepared for the announcement of the slowing in balance sheet normalization from the minutes of the March 19-20 meeting and Chair Jerome Powell's remarks. Fed policymakers were also able to"decouple" the change in balance sheet policy from interest rate policy, and manage anticipation of the future size of the Fed's reserve bank holdings as no higher than previously thought. For the present, the supply of reserves remains"abundant" as the Fed works to return the size of the balance sheet to something considered"ample" as was the case prior to the pandemic.
Fed participants took note that,"The recent monthly data had showed significant increases in components of both goods and services price inflation. In particular, inflation for core services excluding housing had moved up in the first quarter compared with the fourth quarter of last year, and prices of core goods posted their first three-month increase in several months. In addition, housing services inflation had slowed less than had been anticipated based on the smaller increases in measures of market rents over the past year." Further,"some participants emphasized that the recent increases in inflation had been relatively broad based and therefore should not be overly discounted," the minutes said.
The minutes reiterated that the FOMC remains"highly attentive to inflation risks." The first quarter 2024 inflation data,"had not increased their confidence in progress toward 2 percent and, accordingly, had suggested that the disinflation process would likely take longer than previously thought."
In the meantime, the minutes said that"demand and supply in the labor market, on net, were continuing to come into better balance, though at a slower rate." The labor market remains"tight" as of three weeks ago, although the FOMC did not have the April employment report at the time of the meeting. Labor market data since the FOMC meeting suggests that hiring has slowed while job losses have not accelerated. Overall labor market conditions are probably much the same as at the time of the meeting. If the balance in the labor market has improved,"many" FOMC participants noted"an easing of nominal wage pressures". However,"a number" of participants pointed out that the costs of labor continue to rise, and"a couple" said that"negotiated compensation agreements had added to wage pressures in their Districts."
With economic activity at a"solid pace" in the first quarter, albeit more moderate than in the second half of 2023, FOMC participants anticipate"that GDP growth would slow from last year's strong pace."
The FOMC discussed financial stability and"noted vulnerabilities to the financial system that they assessed warranted monitoring." They mentioned,"unrealized losses on assets resulting from the rise in longer-term yields, high CRE exposure, significant reliance by some banks on uninsured deposits, cyber threats, or increased financial interconnections among banks." Around the end of the bank term funding program in March, the Fed indicated that it anticipated using the discount window as its primary tool for liquidity in a crisis."A couple of participants commented that the Federal Reserve should continue to improve the operational efficiency of the discount window," the minutes said. The minutes continued,"Participants generally noted that high interest rates could contribute to vulnerabilities in the financial system. In that context, a number of participants emphasized that monetary policy should be guided by the outlook for employment and inflation and that other tools should be the primary means to address financial stability risks."
The decision to slow the runoff in the balance sheet was not unanimous."Almost all" FOMC participants favored it, while"a few" would have continued at the current pace or slightly higher". The slowing is intended to"facilitate a smooth transition from abundant to ample reserve balances by reducing the likelihood that money markets experience undue stress that could require an early end to runoff." The decision to lower the cap for US treasuries only was deemed in line with the intention to hold primarily US treasuries, while the cap for agency and agency MBS holdings is rarely met in any one month and in no need of adjustment.
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.
