– Most Agree ‘Some Policy Firming’ Needed if Inflation Elevated, Employment Stable
– ‘Almost All’ Agree Cut Rates ‘Eventually’ if Inflation ‘Dissipates,’ Returns to 2%
– ‘A Few’ Made Case For Rate Hike, But Not Immediately
By Steven K. Beckner
(MaceNews) – With Kevin Warsh chairing the Federal Open Market Committee for the first time in mid-June, the Federal Reserve’s policymaking body considered alternative economic scenarios that could lead to either interest rate hikes or to rate cuts, minutes of the meeting released Wednesday show.
Although the FOMC was sharply divided in their economic forecasts and rate projections, the minutes show that FOMC participants were unanimous in wanting to hold the federal funds rate steady for the time being, although “a few” made a case for a rate hike.
And the Fed officials tended to agree on the appropriate policy prescription should different scenarios actually play out – higher rates if above-target inflation were to persist “in the context of stable labor market conditions”; “eventually” lower rates if inflation were to “dissipates” and head toward the Fed’s 2% target.
Most of the Fed governors and Federal Reserve Bank presidents supported a shorter monetary policy statement and the deletion of a previous, longstanding easing bias.
Overhanging the June 16-17 meeting, as the minutes make clear, was a cloud of uncertainty, not only about the war with Iraq but also about how artificial intelligence investment would affect productivity growth and in turn inflation in the future.
But, on balance, the Fed governors and Federal Reserve Bank presidents, were more optimistic about about continued “solid” economic growth and “stable” employment than they were about the outlook for inflation.
And, as they discussed the future course of monetary policy, it was inflation, and the prospects for reducing it to the 2% target from the current 3.6% pace, that predominated.
The minutes themselves did not take on an obviously different look as Warsh began to put his own stamp on Fed communications, although he has issued fair warning that changes are coming.
On June 17 meeting, the FOMC left the federal funds rate unchanged in a target range of 3.5% to 3.75%, but made a major change in its policy statement by ending “forward guidance” on the rate path, thereby removing a six-month-old bias toward a resumption of rate cuts.
FOMC participants differed considerably in their rate projections. The “dot plot” in the revised, quarterly Summary of Economic Projections showed eight officials anticipating that the funds rate will remain where it is through the end of the year; one projecting a 25 basis point rate cut, and nine projecting rate hikes of various sizes.
On net, FOMC participants projected the median funds rate will end the year up 25 basis points to 3.8%, compared to the 3.4% projected in the March SEP. Simultaneously, they forecast that the price index for personal consumption expenditures (PCE) will be up 3.6% from a year earlier in the fourth quarter – compared to just 2.7% in the March SEP.
Warsh, who did not make a projection, told his first post-FOMC press conference that his colleagues had written down their “dots” with “humility” and “in pencil,” implying that they are more than usually subject to change as the economy evolves in coming months.
“I didn’t hear tons of conviction” about the projections and forecasts, he remarked.
As the FOMC minutes note, “all participants supported maintaining the current target range for the federal funds rate,” given that “economic activity had been expanding at a solid pace and that labor market conditions had appeared stable,” while “inflation was elevated.”
In terms of the Fed’s risk management considerations, the minutes say “participants generally assessed that …. upside risks to price stability remained elevated while downside risks to achieving maximum employment had moderated a bit.”
The minutes say there were “a few participants” who made “a case for raising the target range for the federal funds rate,” but added that “those participants indicated that they supported maintaining the current target range at this meeting.”
There was some disagreement on how “restrictive” monetary policy is at current rate levels.
“Several participants remarked that they did not see the current policy stance as restrictive, while a few other participants commented that they saw the current policy stance as slightly restrictive,” the minute say.
In reaching their stand-pat rate decision, with no easing bias, the minutes say FOMC participants had to deal with “high assessed uncertainty.” Hence, there was a discussion of “a range of scenarios for the evolution of the economy and for future monetary policy actions.”
“Most participants remarked on scenarios in which inflationary pressures would dissipate and inflation would soon begin to return to 2%,” the minutes disclose. “In such scenarios, almost all of these participants noted that it would likely be appropriate to maintain or eventually lower the target range for the federal funds rate.”
“Most participants, however, also pointed to scenarios in which, in the context of stable labor market conditions, inflation would remain elevated due to strong AI-related demand, the conflict in the Middle East, or the effects of tariffs,” the minutes continue. “In such scenarios, almost all of these participants indicated that some policy firming would likely be warranted to return inflation to 2%.”
“Regarding participants’ individual assessments of appropriate monetary policy under what each participant judged to be the most likely scenario for the economy, many participants indicated that the appropriate level of the federal funds rate would be within or slightly below the current target range at the end of this year,” the minutes go on.
However, they add that “many other participants … assessed that the appropriate level of the federal funds rate would be above the current target range at the end of this year.”
Warsh has made clear he wants to make unspecified changes in the way the Fed communicates with the public and with financial markets and has appointed a task force for that purpose. The streamlined policy statement issued by the FOMC on June 17 was seen as the first fruits of the Warsh approach, He strongly hinted that he will push for changes in the SEP in his press conference.
The minutes do not address exactly what future communications changes might be made, pending recommendations from Warsh’s task force, but they do note that “some participants commented that they welcomed the opportunity to review the Committee’s communications tools and practices.“
Regarding changes already made on June 17, the minutes say, “A number of participants noted that it was an opportune time to consider significant changes to the FOMC’s post meeting statement. A majority of participants remarked that they saw advantages in shortening the statement.”
“Most participants emphasized that they preferred not to repeat the language in the previous post meeting statement that had suggested an easing bias regarding the likely direction of the Committee’s future interest rate decisions,” the minutes continue.
“Various participants discussed how the public could perceive the changes to the post meeting statement,” they add.
Since the meeting, no clear policy direction has emerged in comments by officials, which admittedly have been more sparse than when Jerome Powell was running things.
Warsh, who took office on May 22 with a dovish reputation, continued to stress his commitment to the Fed’s “price stability” mandate last Wednesday.
“If there were people in the household or the business sector and the financial markets who thought that this central bank was going to be comfortable with an inflation objective above 2%, well, I guess they’d be disappointed. We’re going to deliver price stability in the US,” he told a European Central Bank forum.
Warsh declined again to give any forward guidance on rates, though he said the Fed would “chart a new course” under his supervision. He pledged a “good debate” on policy at the mid-July FOMC meeting.
New York Federal Reserve Bank President John Williams said Tuesday that he “feels a little bit more positive about the near-term inflation outlook because of the energy price declines that we’re going to see.”
The FOMC Vice Chairman, who was speaking before an apparent breakdown in peace talks with Iran caused oil to rebou8nd, reiterated his view that “monetary policy is well-positioned.”
At the last FOMC meeting, Williams said there had been “strong agreement” about removing forward guidance, because “given the uncertainties that we face in terms of inflation, the economic outlook, trying to give explicit forward guidance about where interest rates are going to be was no longer appropriate. The uncertainties are too great.”
Governor Christopher Waller, who had developed a dovish reputation while in the running for the Fed chairmanship, continued to take a more hawkish position Monday, explaining that the risks facing the Fed have “completely flipped around … .The “labor market seems to be stabilizing in the U.S., inflation’s been taking off. So then that changes how you might want to think about policy.”
Waller also pushed back on Warsh’s disfavoring of forward guidance, contending that it can be useful at times.
San Francisco Fed President Mary Daly said last Thursday that the course of monetary policy will depend on which of a couple of scenarios play out.
“I think there’s a scenario where we have to fight inflation that turns out to be more persistent,” she said at a Banco de España conference in Santander, Spain, but “there’s also a scenario where the growth just doesn’t continue to sustain itself … or the investment slows because people are worried they haven’t seen the gains yet.”
The FOMC should be in rush to change rates in any direction, Daly suggested. “You don’t want to react quickly when the world is changing quickly. You want to assess before you jump or act because you’ll make better decisions.”