Highlights
The minutes of the July 30-31 FOMC meeting are from three weeks ago and reflect the thinking of Fed policymakers before the release of the weaker-than-expected July employment report, numbers supporting a resumption of disinflation, the further cooling of inflation expectations, and signs that consumer spending is holding up at the start of the third quarter. These also do not include the August 21 release of the BLS preliminary estimate of the annual benchmark revisions for payroll numbers which was a big decrease of 818,000 from April 2023 to March 2024.
Three weeks ago, the FOMC had a more positive view on the inflation outlook with progress on inflation not only in commodities but also"broad based across the major subcomponents of core inflation". Importantly,"Price inflation in June for housing services showed a notable slowing, which participants had been anticipating for some time. In addition, core nonhousing services prices had decelerated in recent months."
Progress in upward price pressure on services and housing contributed to policymakers' improved outlook on inflation. The minutes said,"Participants judged that recent data had increased their confidence that inflation was moving sustainably toward 2 percent. Almost all participants observed that the factors that had contributed to recent disinflation would likely continue to put downward pressure on inflation in coming months. These factors included a continued waning of pricing power, moderating economic growth, and the runoff in excess household savings accumulated during the pandemic.""Many participants" also noted slower wage increases that would"contribute to disinflation, particularly in core nonhousing services prices". This is where the FOMC has been seeking indications that inflation overall was coming down.
Inflation expectations have remained well-anchored even with"considerable momentum" in growth and that"the labor market remained strong" and has come into"better balance". Notably,"Many participants noted that reported payroll gains might be overstated, and several assessed that payroll gains may be lower than those needed to keep the unemployment rate constant with a flat labor force participation rate." The BLS annual benchmark revision estimate bears this out.
In any case, with an expanding labor force and moderation in wage growth, overall labor market conditions had"returned to about where they stood on the eve of the pandemic strong but not overheated."
GDP growth was seen as more modest in the first half of 2024 than the second half of 2023, and in line with FOMC forecasts. The minutes noted,"PDFP growth, which usually gives a better signal than GDP growth of economic momentum, also moderated in the first half, but by less than GDP growth. PDFP expanded at a solid pace, supported by growth in consumer spending and business fixed investment."
The FOMC took note of potential credit problems and rising strains among lower- and moderate-income households"as they attempted to meet higher living costs after having largely run down savings accumulated during the pandemic. These participants noted that such strains were evident in indicators such as rising credit card delinquency rates and an increased share of households paying the minimum due on balances, and warranted continued close monitoring."
The balance of risks to the economic outlook were less to the upside for inflation, while risks to employment were increased. The minutes said,"Participants saw risks to achieving the inflation and employment objectives as continuing to move into better balance, with a couple noting that they viewed these risks as more or less balanced. Some participants noted that as conditions in the labor market have eased, the risk had increased that continued easing could transition to a more serious deterioration. As sources of upside risks to inflation, some participants cited the potential for disruptions to supply chains and a further deterioration in geopolitical conditions. A few participants noted that an easing of financial conditions could boost economic activity and present an upside risk to economic growth and inflation."
Financial stability risks remained present. While the banking system was deemed"sound", but with"risks associated with unrealized losses on securities, reliance on uninsured deposits, and interconnections with nonbank financial intermediaries." The use of the discount window"is an important liquidity backstop" and the Fed should"continue to improve the window's operational efficiency and to communicate effectively about the window's value." Fed policymakers have previously said around the time of the end of the bank term funding program that in the future the discount window would be the primary means of addressing liquidity needs in times of strain.
Developments since the July 30-31 meeting have further strengthened the"plausible case for reducing the target range 25 basis points" made at the July deliberations made by"several" participants. The decision to keep the fed funds target rate range at 5.25-5.50 percent was unanimous and"almost all" wanted"greater confidence that inflation was moving sustainably toward the Committee's 2 percent objective before it would be appropriate" to cut the rate.
There were a"range of views about the degree of restrictiveness" of monetary policy, with a definite easing bias for the next meeting on September 17-18. Nevertheless, participants viewed the incoming data as enhancing their confidence that inflation was moving toward the Fed's objective. The minutes said,"The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting."
Three weeks ago, the FOMC had a more positive view on the inflation outlook with progress on inflation not only in commodities but also"broad based across the major subcomponents of core inflation". Importantly,"Price inflation in June for housing services showed a notable slowing, which participants had been anticipating for some time. In addition, core nonhousing services prices had decelerated in recent months."
Progress in upward price pressure on services and housing contributed to policymakers' improved outlook on inflation. The minutes said,"Participants judged that recent data had increased their confidence that inflation was moving sustainably toward 2 percent. Almost all participants observed that the factors that had contributed to recent disinflation would likely continue to put downward pressure on inflation in coming months. These factors included a continued waning of pricing power, moderating economic growth, and the runoff in excess household savings accumulated during the pandemic.""Many participants" also noted slower wage increases that would"contribute to disinflation, particularly in core nonhousing services prices". This is where the FOMC has been seeking indications that inflation overall was coming down.
Inflation expectations have remained well-anchored even with"considerable momentum" in growth and that"the labor market remained strong" and has come into"better balance". Notably,"Many participants noted that reported payroll gains might be overstated, and several assessed that payroll gains may be lower than those needed to keep the unemployment rate constant with a flat labor force participation rate." The BLS annual benchmark revision estimate bears this out.
In any case, with an expanding labor force and moderation in wage growth, overall labor market conditions had"returned to about where they stood on the eve of the pandemic strong but not overheated."
GDP growth was seen as more modest in the first half of 2024 than the second half of 2023, and in line with FOMC forecasts. The minutes noted,"PDFP growth, which usually gives a better signal than GDP growth of economic momentum, also moderated in the first half, but by less than GDP growth. PDFP expanded at a solid pace, supported by growth in consumer spending and business fixed investment."
The FOMC took note of potential credit problems and rising strains among lower- and moderate-income households"as they attempted to meet higher living costs after having largely run down savings accumulated during the pandemic. These participants noted that such strains were evident in indicators such as rising credit card delinquency rates and an increased share of households paying the minimum due on balances, and warranted continued close monitoring."
The balance of risks to the economic outlook were less to the upside for inflation, while risks to employment were increased. The minutes said,"Participants saw risks to achieving the inflation and employment objectives as continuing to move into better balance, with a couple noting that they viewed these risks as more or less balanced. Some participants noted that as conditions in the labor market have eased, the risk had increased that continued easing could transition to a more serious deterioration. As sources of upside risks to inflation, some participants cited the potential for disruptions to supply chains and a further deterioration in geopolitical conditions. A few participants noted that an easing of financial conditions could boost economic activity and present an upside risk to economic growth and inflation."
Financial stability risks remained present. While the banking system was deemed"sound", but with"risks associated with unrealized losses on securities, reliance on uninsured deposits, and interconnections with nonbank financial intermediaries." The use of the discount window"is an important liquidity backstop" and the Fed should"continue to improve the window's operational efficiency and to communicate effectively about the window's value." Fed policymakers have previously said around the time of the end of the bank term funding program that in the future the discount window would be the primary means of addressing liquidity needs in times of strain.
Developments since the July 30-31 meeting have further strengthened the"plausible case for reducing the target range 25 basis points" made at the July deliberations made by"several" participants. The decision to keep the fed funds target rate range at 5.25-5.50 percent was unanimous and"almost all" wanted"greater confidence that inflation was moving sustainably toward the Committee's 2 percent objective before it would be appropriate" to cut the rate.
There were a"range of views about the degree of restrictiveness" of monetary policy, with a definite easing bias for the next meeting on September 17-18. Nevertheless, participants viewed the incoming data as enhancing their confidence that inflation was moving toward the Fed's objective. The minutes said,"The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting."
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.
