WASHINGTON (MaceNews) – As described at the time by Federal Reserve Chair Jay Powell, the July 27-28 Federal Open Market Committee saw a variety of views about when to start the tapering progress, exhibiting considerably more caution than much of the subsequent Fedspeak advocating faster action, the minutes of the meeting suggested Wednesday.
The section of the minutes devoted to the views of participants, the Fed Board members and voters and non-voters among the regional bank presidents, follows, with bold-faced emphasis added:
Participants’ Views on Current Economic Conditions and the Economic Outlook
In their discussion of current conditions, participants noted that, with progress on vaccinations and strong policy support, indicators of economic activity and employment had continued to strengthen. The sectors most adversely affected by the pandemic had shown improvement but had not fully recovered. Inflation had risen, largely reflecting transitory factors. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants noted that the path of the economy would continue to depend on the course of the virus. Progress on vaccinations would likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remained.
Participants observed that economic activity continued to expand at a rapid pace through the middle of the year even though capacity constraints were restraining the increase in output in some sectors. Economic growth was expected to remain strong over the second half of the year, supported by the further reopening of the economy, accommodative financial conditions, and easing of supply constraints. Nevertheless, participants generally saw supply disruptions and labor shortages as likely to persist over the second half of the year.
In their discussion of the household sector, participants remarked that consumer spending had continued to increase at a very rapid pace, supported by the ongoing reopening of the economy along with the accommodation provided by fiscal policy and monetary policy. In addition, the accumulated stock of savings and further progress on vaccination were cited as important factors lifting household spending. Some participants noted that they expected consumer spending to continue to be bolstered by these factors. Participants generally expected housing demand to remain strong but noted that construction had been restrained by shortages of materials and other inputs and that home sales had been held back by limited supplies of available homes.
With respect to the business sector, participants observed that activity in the service industries most adversely affected by the pandemic, such as in the leisure and hospitality sector, was rebounding as the economy reopened further but had not fully recovered. Participants noted that growth in manufacturing activity continued to be solid but was restrained by production bottlenecks and supply constraints, particularly in the motor vehicle sector. Citing reports received from contacts in a broad range of industries, participants indicated that shortages of materials and labor as well as supply chain challenges remained widespread and continued to limit the ability of firms to keep up with strong demand. Even though their outlook for demand had improved further, many business contacts had expressed uncertainty and pessimism over prospects regarding the easing of supply constraints over the near term.
Participants commented on the continued improvement in labor market conditions in recent months driven by strong demand for workers. The monthly pace of job gains had picked up, with employment expanding 850,000 in June and with notable increases in the leisure and hospitality sector. Nevertheless, the household survey showed that the unemployment rate remained elevated at 5.9 percent in June, and the labor force participation rate and employment-to-population ratio were little changed in recent months. Participants indicated that the economy had not yet achieved the Committee’s broad-based and inclusive maximum-employment goal. Several participants remarked that the labor market recovery continued to be uneven across demographic and income groups and across sectors. Participants generally noted that supply-side factors related to the pandemic—such as caregiving needs, ongoing fears of the virus, increased retirements, and expanded unemployment insurance payments—continued to weigh on labor force participation and employment growth. A majority of participants anticipated that most of these factors would ease in the coming months. They also noted, however, that the spread of the Delta variant may temporarily delay the full reopening of the economy and restrain hiring and labor supply.
Participants observed that recent wage increases had been moderate on average. However, District contacts had continued to report having trouble hiring workers and had indicated that this difficulty was putting upward pressure on wages in some sectors or leading employers to provide additional incentives to attract and retain workers. Several participants noted that their District contacts expected that difficulties finding workers would likely extend into the fall.
In their discussion of inflation, participants observed that the inflation rate had increased notably and expected that it would likely remain elevated in coming months before moderating. Participants remarked that inflation had increased generally more than expected this year and attributed this increase to supply constraints in product and labor markets and a surge in consumer demand as the economy reopened. They noted that many of their District contacts had reported that higher input costs were also putting upward pressure on prices. Many participants pointed out that the largest contributors to recent increases in measures of inflation were a handful of sectors most affected by temporary supply bottlenecks or sectors in which price levels were rebounding from depressed levels as the economy continued to reopen. Looking ahead, while participants generally expected inflation pressures to ease as the effect of these transitory factors dissipated, several participants remarked that larger-than-anticipated supply chain disruptions and increases in input costs could sustain upward pressure on prices into 2022. In their comments on inflation expectations, some participants noted that measures of longer-term inflation expectations had remained in ranges that were viewed as broadly consistent with the Committee’s longer-run inflation goal. Several participants indicated that the recent increases in survey-based measures signaled a risk that longer-term inflation expectations might be moving up above levels consistent with the Committee’s goals. Other participants pointed to the substantial decline in TIPS-based longer-term inflation compensation since June as suggesting that investors perceived reduced risks that inflation could run persistently above the Committee’s 2 percent goal. A couple of participants noted that recent readings on forward inflation compensation could be read as suggesting investor concern that inflation over the longer term could run persistently below the Committee’s 2 percent inflation goal.
In discussing the uncertainty and risks associated with the economic outlook, many participants remarked that uncertainty was quite high, with slowing in progress on vaccinations and developments surrounding the Delta variant posing downside risks to the economic outlook. A number of participants judged that the effects of supply chain disruptions and labor shortages would likely complicate the task of interpreting the incoming data and assessing the speed at which these supply-side factors would dissipate. Some participants noted that there were upside risks to inflation associated with concerns that supply disruptions and labor shortages might linger for longer than currently anticipated and might have larger or more persistent effects on prices and wages than they currently assumed.
Participants who commented on financial stability emphasized the risks associated with elevated valuations across many asset classes. A few participants highlighted scenarios in which a prolonged period of low interest rates and broadly elevated asset valuations could generate imbalances, which could increase financial stability risks. Some participants commented on the housing market and noted that ongoing rapid house price increases reflected both demand and supply factors. Several participants noted that the lack of evidence of deteriorating mortgage underwriting standards could mitigate risks associated with high housing valuations; a couple of other participants, however, expressed concern that a home price reversal could pose risks to financial stability. Some participants cited various potential risks to financial stability including the risks associated with expanded use of cryptocurrencies or the risks associated with collateral liquidity at central counterparties during episodes of market stress. In connection with the former set of risks, a few of these participants highlighted the fragility and the general lack of transparency associated with stablecoins, the importance of monitoring them closely, and the need to develop an appropriate regulatory framework to address any risks to financial stability associated with such products.
In their consideration of the stance of monetary policy, participants reaffirmed the Federal Reserve’s commitment to using its full range of tools to support the U.S. economy during this challenging time, thereby promoting the Committee’s statutory goals of maximum employment and price stability. Participants judged that the current stance of monetary policy remained appropriate to promote maximum employment as well as to achieve inflation that averages 2 percent over time and longer-term inflation expectations that are well anchored at 2 percent. Participants also reiterated that the existing outcome-based guidance implied that the paths of the federal funds rate and the balance sheet would depend on actual progress toward reaching the Committee’s maximum-employment and inflation goals.
Participants discussed the progress toward the Committee’s goals since December 2020, when the Committee adopted its guidance for asset purchases. They generally judged that the Committee’s standard of “substantial further progress” toward the maximum-employment and inflation goals had not yet been met, particularly with respect to labor market conditions, and that risks to the economic outlook remained. Most participants anticipated that the economy would continue to make progress toward those goals and, provided that the economy evolved broadly as they anticipated, they judged that the standard set out in the Committee’s guidance regarding asset purchases could be reached this year. With regard to the labor market, participants noted that the demand for workers had been strong in recent months, while the level of employment had been constrained by labor supply shortages and hiring difficulties. Several participants emphasized that employment remained well below its pre-pandemic level and that a robust labor market, supported by a continuation of accommodative monetary policy, would allow further progress toward the Committee’s broad and inclusive maximum-employment goal and a return over time to labor market conditions as strong as those prevailing before the pandemic. A few other participants judged that monetary policy had limited ability to address the labor supply shortages and hiring difficulties currently constraining the level of employment. Several participants also commented that the pandemic might have caused longer-lasting changes in the labor market and that the pre-pandemic labor market conditions may not be the right benchmark against which the Committee should assess the progress toward its maximum-employment objective.
With regard to inflation, participants commented that recent inflation readings had been boosted by the effects of supply bottlenecks and labor shortages and were likely to be transitory. A few participants noted that, while the specific results depended on the period used in the calculation, some measures of average inflation were already moving above, or would soon move above, the Committee’s 2 percent goal, supported by strong demand, a tight labor market, and firming inflation expectations. Some other participants emphasized that recent high inflation readings had largely been driven by price increases in a handful of categories. These participants pointed out that there was no evidence of broad-based price pressures or of inappropriately high longer-term inflation expectations. Several participants also commented that price increases concentrated in a small number of categories were unlikely to change underlying inflation dynamics sufficiently to overcome the possibility of a persistent downward bias in inflation, as might be associated with the effective lower bound on the policy rate.
Many participants remarked upon risk-management considerations when contemplating how and when to make changes to the Committee’s pace of asset purchases. Some participants suggested that it would be prudent for the Committee to prepare for starting to reduce its pace of asset purchases relatively soon, in light of the risk that the recent high inflation readings could prove to be more persistent than they had anticipated and because an earlier start to reducing asset purchases would most likely enable additions to securities holdings to be concluded before the Committee judged it appropriate to raise the federal funds rate. A few participants expressed concerns that maintaining highly accommodative financial conditions might contribute to a further buildup in risk to the financial system that could impede the attainment of the Committee’s dual-mandate goals. In contrast, a few other participants suggested that preparations for reducing the pace of asset purchases should encompass the possibility that the reductions might not occur for some time and highlighted the risks that rising COVID-19 cases associated with the spread of the Delta variant could cause delays in returning to work and school and so damp the economic recovery. Several participants also remained concerned about the medium-term outlook for inflation and the possibility of the reemergence of significant downward pressure on inflation, especially in light of the recent decline in longer-term inflation compensation. In addition, several participants emphasized that there was considerable uncertainty about the likely resolution of the labor market shortages and supply bottlenecks and about the influence of pandemic-related developments on longer-run labor market and inflation dynamics. Those participants stressed that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans on asset purchases.
Some participants emphasized that a decision to reduce the Committee’s pace of asset purchases once the “substantial further progress” benchmark had been achieved would be fully consistent with the Committee’s new monetary policy framework and would help foster the achievement of the Committee’s longer-run objectives over time. A couple of participants also noted that a tapering of asset purchases did not amount to a tightening of the stance of monetary policy and instead only implied that additional monetary accommodation would be provided at a slower rate. Several participants emphasized that an announcement of a reduction in the Committee’s pace of asset purchases should not be interpreted as the beginning of a predetermined course for raising the federal funds rate from its current level. Those participants stressed that the Committee’s assessment regarding the appropriate timing of an increase in the target range for the federal funds rate was separate from its current deliberations on asset purchases and would be subject to the higher standard, as laid out in the Committee’s outcome-based guidance on the federal funds rate. Nonetheless, a couple of participants cautioned that it could be challenging for the public to disentangle deliberations about the two tools and that any decisions the Committee made on its asset purchases would likely influence the public’s understanding of the Committee’s other policy intentions, including with regard to future decisions concerning the target range for the federal funds rate.
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