– Policy Focus Remained on Curbing Inflation, But ‘Many’ Warned of Overdoing It
– No Clear Signal from Minutes On Size of Sept. 21 Rate Hike
By Steven K. Beckner
(MaceNews) – Federal Reserve officials continued to tilt toward a tighter monetary policy at their late July Federal Open Market Committee meeting, but while they continued to focus on fighting inflation, they also confronted mounting signs of economic cooling, minutes released Wednesday reveal.
Faced with “upside risks” to inflation and “downside risks” to economic activity, FOMC participants generally favored moving monetary policy beyond “neutral” to a “restrictive” stance at their July 26-27 meeting, but the minutes say “many” of them warned against moving interest rates up too far or too fast.
Fed watchers had been hoping for some indication of how much the FOMC might raise the federal funds rate at its next meeting on Sept. 20-21, but the minutes provide no clear indication whether the next rate hike is likely to be 75 basis points or 50 basis points.
The minutes reflect ChairJerome Powell’s statement after the July meeting that he and his colleagues would henceforth “make decisions meeting by meeting” and “not provide the kind of clear guidance that we had provided on the way to neutral.” He said the FOMC would be looking at incoming data to determine “whether the stance of policy we have is sufficiently restrictive to bring inflation back to our 2% target.”
In the same vein, the minutes state, “Participants concurred that the pace of policy rate increases and the extent of future policy tightening would depend on the implications of incoming information for the economic outlook and risks to the outlook.”
Echoing Powell, the minutes say “participants judged that, as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation.”
“Some participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2%,” the minutes add.
For the second straight meeting, the FOMC raised the federal funds rate by 75 basis points on July 27 – lifting the target range to a range of 2.25% to 2.50%.
Afterward, Powell told reporters he and his fellow policy-makers had now pushed the funds rate up to “the range of what we think is neutral.” He said the FOMC “might do another unusually large rate increase” at its Sept. 20-21 meeting, but said “now we’re getting closer to where we need to be” and said, “at some point, it will be appropriate to slow down.”
Similarly, the minutes say, “participants observed that, following this meeting’s policy rate hike, the nominal federal funds rate would be within the range of their estimates of its longer-run neutral level.”
But the minutes make clear the FOMC felt, as of July 27, that they still had a lot of work to do to bring inflation under control. “Even so, with inflation elevated and expected to remain so over the near term, some participants emphasized that the real federal funds rate would likely still be below shorter-run neutral levels after this meeting’s policy rate hike.”
Echoing the FOMC’s policy statement, the minutes say, “participants continued to anticipate that ongoing increases in the target range for the federal funds rate ….”
“With inflation remaining well above the Committee’s objective, participants judged that moving to a restrictive stance of policy was required to meet the Committee’s legislative mandate to promote maximum employment and price stability,” they continue.
The FOMC faced something of a dilemma in July as they raised rates for the fourth time for a cumulative 225 basis points of tightening.
On the one hand, Fed officials saw a clear need to continue tightening monetary policy to vanquish inflation. On the other hand, there was concern about overdoing the tightening, although Kansas City Federal Reserve Bank President Esther George refrained from dissenting against the 75 basis point rate hike as she had in June.
In they engaged in their usual “risk management” exercise, FOMC participants ‘judged that a significant risk facing the Committee was that elevated inflation could become entrenched if the public began to question the Committee’s resolve to adjust the stance of policy sufficiently ….”
On the other hand, the minutes say, “many participants remarked that, in view of the constantly changing nature of the economic environment and the existence of long and variable lags in monetary policy’s effect on the economy, there was also a risk that the Committee could tighten the stance of policy by more than necessary to restore price stability. These participants highlighted this risk as underscoring the importance of the Committee’s data-dependent approach to judging the pace and magnitude of policy firming over coming quarters.”
Such mixed feelings about the appropriate pace of tightening, in turn reflected another dichotomy on the balance of economic risks.
Although Powell denied the economy was in recession, FOMC participants acknowledged that “recent indicators of spending and production had softened ….” They noted that “consumer expenditures, housing activity, business investment, and manufacturing production had all decelerated from the robust rates of growth seen in 2021.”
Aside from weaker domestic demand, “a deterioration in the foreign economic outlook and a strong dollar were contributing to a weakening of external demand,” the minutes say. So “participants anticipated that U.S. real GDP would expand in the second half of the year, but many expected that growth in economic activity would be at a below-trend pace, as the period ahead would likely see the response of aggregate demand to tighter financial conditions become stronger and more broad based.”
Despite mounting signs of slower economic growth and the prospect of further weakness, Fed officials faced a “strong” labor market situation. But even there, fissures were observed.
Though the unemployment rate was “very low, job vacancies and quits close to historically high levels, and an elevated rate of nominal wage growth,” the minutes say, “many participants also noted, however, that there were some tentative signs of a softening outlook for the labor market: These signs included increases in weekly initial unemployment insurance claims, reductions in quit rates and vacancies, slower growth in payrolls than earlier in the year, and reports of cutbacks in hiring in some sectors.”
“In addition, although nominal wage growth remained strong according to a wide range of measures, there were some signs of a leveling off or edging down,” they add.
Despite these mixed economic signals, the FOMC remained heavily focused on, or “highly attentive to,” elevated inflation, and that is what drove the decision to raise rates aggressively again.
The FOMC did not have in hand the July consumer price index, which decelerated from 9.1% to 8.5% year over year, but the dip owed much to declining gasoline prices, and the minutes say such factors “could not be relied on as providing a basis for sustained lower inflation, as these prices could quickly rebound ….”
There was also concern about inflation expectations. Although longer term expectations were seen as consistent with 2% inflation, officials “stressed that moving to an appropriately restrictive stance of policy was essential for avoiding an unanchoring of inflation expectations,” according to the minutes.
The FOMC ended up with a contradictory assessment of risks. On one hand, “uncertainty about the medium-term course of inflation remained high, and the balance of inflation risks remained skewed to the upside, with several participants highlighting the possibility of further supply shocks arising from commodity markets.”
However, “participants saw the risks to the outlook for real GDP growth as primarily being to the downside.”
For the July and, prospectively, the September meetings, these conflicting sets of risks were resolved decisively in favor of continuing to tighten credit to combat inflation, but the minutes leave in doubt how long and how aggressively the FOMC will continue that campaign.
The minutes make clear that the pace of tightening will slow at some point, but that this pivot point will depend heavily on how soon the FOMC becomes satisfied that its effort to curb inflation by bringing supply and demand “into balance” is succeeding.