WASHINGTON (MaceNews) – The Federal Open Market Committee’s latest meeting saw a cautious wariness about the possible arrival of worse data – anticipating the day’s CPI — but still hopeful for a rate cut or more later this year, according to the minutes of the meeting released Wednesday.
The portion of the minutes devoted to participant views follows, with boldfacing added:
Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of inflation, participants observed that significant progress had been made over the past year toward the Committee’s 2 percent inflation objective even though the two most recent monthly readings on core and headline inflation had been firmer than expected. Some participants noted that the recent increases in inflation had been relatively broad based and therefore should not be discounted as merely statistical aberrations. However, a few participants noted that residual seasonality could have affected the inflation readings at the start of the year. Participants generally commented that they remained highly attentive to inflation risks but that they had also anticipated that there would be some unevenness in monthly inflation readings as inflation returned to target.
In their outlook for inflation, participants noted that they continued to expect that inflation would return to 2 percent over the medium term. They remained concerned that elevated inflation continued to harm households, especially those least able to meet the higher costs of essentials like food, housing, and transportation. A few participants remarked that they expected core nonhousing services inflation to decline as the labor market continued to move into better balance and wage growth moderated further. Participants discussed the still-elevated rate of housing services inflation and commented on the uncertainty regarding when and by how much lower readings for rent growth on new leases would pass through to this category of inflation. Several participants noted that the disinflationary pressure for core goods that had resulted from the receding of supply chain bottlenecks was likely to moderate. Other factors related to aggregate supply, such as increases in the labor force or better productivity growth, were viewed by several participants as likely to support continued disinflation. Some participants reported that business contacts had indicated that they were less able to pass on price increases or that consumers were becoming more sensitive to price changes. Some participants observed that longer-term inflation expectations appeared to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.
Participants expected that economic growth would slow from last year’s strong pace. With regard to the household sector, participants noted that consumption spending generally remained solid, although many commented that recent readings on retail sales had been soft. Several participants pointed to the strong labor market, ongoing wage gains, and a generally healthy household-sector balance sheet as likely to continue to support consumption. Participants noted mixed reports about the pace of homebuilding amid still-elevated financing costs for developers, despite strong housing demand and a limited supply of affordable housing. Some participants noted that increased immigration, which had likely been boosting the growth of personal consumption spending, may also have been adding to the demand for housing. Many participants pointed to indicators such as higher credit card balances, greater use of buy-now-pay-later programs, or rising delinquency rates on some types of consumer loans as evidence that the finances of some lower- and moderate-income households might be coming under pressure; these developments were seen by these participants as a downside risk to the outlook for consumption spending.
Reports from business contacts in some industries and Districts conveyed increased optimism about the outlook, while contacts in a couple of other Districts reported only a steady or stable pace of economic activity. Restrictive credit conditions were cited by a few participants as restraining sectors such as equipment investment and residential investment. However, several participants noted that their contacts had reported increased investment in technology or in business process improvements that were enhancing productive capacity and helping businesses ameliorate the effects of a tight labor market. Manufacturing activity was characterized as stable. A couple of participants noted that high input costs and lower expected commodity prices were weighing on farm incomes.
Participants assessed that demand and supply in the labor market were continuing to come into better balance, although conditions generally remained tight. Participants noted strong recent payroll growth, while the unemployment rate remained low. Participants cited a variety of indicators that suggested some easing in labor market conditions, including declining job vacancies, a lower quits rate, and a reduced ratio of job openings to unemployed workers. Some participants indicated that business contacts had reported less difficulty in hiring or retaining workers. Several participants noted that the better balance between labor supply and demand had contributed to an easing of nominal wage pressures. Nevertheless, some participants observed that portions of the labor market, such as the health-care sector and in less urban areas, remained very tight. Most participants noted that, during the past year, labor supply had been boosted by increased labor force participation as well as by immigration. Participants further commented that recent estimates of greater immigration in the past few years and an overall increase in labor supply could help explain the strength in employment gains even as the unemployment rate had remained roughly flat and wage pressures had eased.
Participants discussed the uncertainties around the economic outlook. Participants generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was moving sustainably down to 2 percent. Some participants pointed to geopolitical risks that might result in more severe supply bottlenecks or higher shipping costs that could put upward pressure on prices, and observed that those developments could also weigh on economic growth. The possibility that geopolitical events or surges in domestic demand could generate increased energy prices was also seen as an upside risk to inflation. Some participants noted the uncertainties regarding the restrictiveness of financial conditions and the associated risk that conditions were or could become less restrictive than desired, which could add momentum to aggregate demand and put upward pressure on inflation. Several participants commented that increased efficiencies and technological innovations had the potential to raise productivity growth, which might allow the economy to grow faster without raising inflation. Participants also noted downside risks to economic activity, including slowing economic growth in China, a deterioration in conditions in domestic CRE markets, a potential reemergence of stresses in the banking sector, or the possibility that a pickup in layoffs could result in a relatively rapid rise in unemployment. Many participants pointed to the difficulty in assessing how recent immigration trends would influence the evolution of labor supply, aggregate demand, and overall economic activity.
In their consideration of monetary policy at this meeting, all participants judged that, in light of current economic conditions, the outlook for economic activity and inflation, and the balance of risks, it was appropriate to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. Participants also agreed that it was appropriate to continue the process of reducing the Federal Reserve’s securities holdings, as described in the previously announced Plans for Reducing the Size of the Federal Reserve’s Balance Sheet. Participants commented that maintaining the current target range for the federal funds rate at this meeting would support the Committee’s progress to return inflation to the 2 percent objective and keep longer-term inflation expectations well anchored.
In discussing the policy outlook, participants judged that the policy rate was likely at its peak for this tightening cycle, and almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as they expected. In support of this view, they noted that the disinflation process was continuing along a path that was generally expected to be somewhat uneven. They also pointed to the Committee’s policy actions together with the ongoing improvements in supply conditions as factors working to move supply and demand into better balance. Participants noted indicators pointing to strong economic momentum and disappointing readings on inflation in recent months and commented that they did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent. Participants remarked that in considering any adjustments to the target range for the federal funds rate at future meetings, they would carefully assess incoming data, the evolving outlook, and the balance of risks. Participants noted the importance of continuing to communicate clearly the Committee’s data-dependent approach in formulating monetary policy and the strong commitment to achieve its dual-mandate objectives of maximum employment and price stability.
In discussing risk-management considerations that could bear on the policy outlook, participants generally judged that risks to the achievement of the Committee’s employment and inflation goals were moving into better balance. They remarked that it was important to weigh the risks of maintaining a restrictive stance for too long, which could unduly weaken economic activity and employment, against the risks of easing policy too quickly, which could stall or even reverse progress in returning inflation to the Committee’s 2 percent inflation objective. Regarding the latter risk, participants emphasized the importance of carefully assessing incoming data to judge whether inflation is moving down sustainably to 2 percent. Participants noted various sources of uncertainty associated with their outlooks for economic activity, the labor market, and inflation, with some participants additionally mentioning uncertainty about the extent to which past monetary policy actions or the current stance of policy would weigh further on aggregate demand. Participants agreed, however, that monetary policy remained well positioned to respond to evolving economic conditions and risks to the outlook, including the possibility of maintaining the current restrictive policy stance for longer should the disinflation process slow, or reducing policy restraint in the event of an unexpected weakening in labor market conditions.
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