– But Need For ‘Risk Management,’ Avoiding Overtightening Cited
– Officials Anxious to Avoid Perception of Less Anti-Inflation Commitment to
By Steven K. Beckner
(MaceNews) – At their final monetary policy meeting of 2022, Federal Reserve officials were together in their commitment to reducing inflation in the year ahead, but somewhat less united on how aggressively they need to raise interest rates to accomplish that goal, minutes released Wednesday show.
In raising the federal funds rate more slowly on Dec. 14, officials were keen to convince financial markets that this did not represent a lessening of their determination to fight inflation, fearing a loosening of financial conditions that would work against their anti-inflation campaign.
Chair Jerome Powell and his fellow policymakers were somewhat confounded by the economic and financial uncertainties with which they will have to contend in 2023 at the Dec. 13-14 Federal Open Market Committee meeting, the minutes suggest.
While united on the need to keep combating inflation, Fed officials talked about the need for “risk management,” including managing the risks of tightening monetary policy too much.
On the whole, though, there was a high degree of unanimity on the need to keep raising the federal funds rate to make it “sufficiently restrictive” to reduce inflation to the Fed’s 2% target.
FOMC participants “concurred that the Committee had made significant progress over the past
year in moving toward a sufficiently restrictive stance of monetary policy,” according to the minutes. “Even so, participants agreed that inflation remained well above the Committee’s longer-run goal of 2%, while the labor market remained very tight, contributing to upward pressures on wages and prices.”
So, the FOMC raised the funds rate a seventh time since it ceased holding it near zero until March, making a cumulative 425 basis points of tightening for 2022. After four straight 75 basis point increases, the FOMC raised it just 50 basis points on Dec. 14 to a target range of 4.25% to 4.50% — “still a historically large increase,” as Powell said at the time.
The minutes say FOMC participants thought “a slowing in the pace of rate increases at this meeting would better allow the Committee to assess the economy’s progress toward the Committee’s goals of maximum employment and price stability, as monetary policy approached a stance that was sufficiently restrictive to achieve these goals.”
But lest the smaller rate hike be misinterpreted as a lessening of the Fed’s anti-inflation resolve, the FOMC declared in its policy statement that “ongoing increases” were likely to be needed to lift the key short-term rate to a level “sufficiently restrictive” to reduce inflation to the Fed’s 2% target.
And that expectation was underscored in the final 2022 “dot plot” of funds rate projections.
FOMC participants, who began 2022 projecting a median funds rate of 0.9% by the end of the year, but steadily revised that higher, continued to lift their sights at the mid-December meeting. They revised up their projections for 2023 from 4.6% in the September Summary of Economic Projections to 5.1% in the December SEP. Individual projections ranged from as low as 4.9% to as high as 5.6%.
The minutes note that “all participants had raised their assessment of the appropriate path of the federal funds rate relative to their assessment at the time of the September meeting” and that “no
participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.”
The minutes go on to say that “participants generally observed that a restrictive policy
stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2%, which was likely to take some time.”
“In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy,” the minutes add.
In the weeks leading up to the December meeting, there had been an easing of financial conditions, as reflected in both falling bond yields and rising stock prices, and the minutes reveal that this untoward behavior was very much of the minds of Fed officials.
“A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price stability goal or a judgment that inflation was already on a persistent downward path,” they say.
“Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the
public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability,” the minutes continue.
Some officials commented that the fact hat rate projections had “tracked notably above market-based measures of policy rate expectations, underscored the Committee’s strong commitment to returning inflation to its 2% goal.”
Despite the unanimous vote on the 50 basis point rate hike and the high degree of consensus on the need for further rate hikes, the minutes disclose a discussion of “risk-management considerations related to the conduct of monetary policy.”
It was felt that the FOMC needed to “balance two risks.” On the one hand was the risk that “an insufficiently restrictive monetary policy could cause inflation to remain above the Committee’s target for longer than anticipated, leading to unanchored inflation expectations and eroding the purchasing power of households, especially for those already facing difficulty making ends meet.”
On the other hand, there was the perceived risk was that “the lagged cumulative effect of policy tightening could end up being more restrictive than is necessary to bring down inflation to 2% and lead to an unnecessary reduction in economic activity, potentially placing the largest burdens on the most vulnerable groups of the population.”
Fed officials generally thought that upside risks to inflation predominated, but the minutes say “a couple of participants noted that risks to the inflation outlook were becoming more balanced.”
Tight labor market conditions and their impact on wage-price pressures were a big focus of the meeting, judging from the minutes, but there was hope that the situation was getting better.
“Participants observed that the labor market had remained very tight, with the unemployment rate near a historically low level, robust payroll gains, a high level of job vacancies, and elevated nominal wage growth,” they say.
However, “several participants commented that there were tentative signs of labor market imbalances improving, including declines in job openings and quits over the second half of 2022 as well as reports from District contacts that they were seeing more qualified job applicants for open positions than earlier in the year.”
The minutes say Fed officials “generally concluded that there remained a large imbalance between labor supply and labor demand, as indicated by the still-large number of job openings and elevated nominal wage growth.”
But they agreed that “an appropriately restrictive path of monetary policy” would enable “labor market supply and demand to come into better balance over time, easing upward pressures on nominal wages and prices.”
The 5.1% median rate projection for 2023 was predicated in part on a forecast that inflation, as measured by the price index for personal consumption expenditures, will be nearly cut in half to 3.1%, but that was higher than the 2.8% forecast in September.
So, while FOMC participants “welcomed” recent signs of moderation, they still deemed inflation “unacceptably high.
The minutes say participants “stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path.” While good prices had retreated, there was a high level of concern about core service prices, which were in turn related to tight labor markets and wage pressures.