A pair of Fed officials favored keeping rates on hold at last month’s policy gathering, FOMC minutes released on Wednesday afternoon in the US revealed.
I’m not sure “revealed” is the best word choice. The scope for revelations from the account of the July meeting was limited.
Last month’s rate increase was either the final hike of the cycle or the penultimate hike. It depends on the evolution of the data. That’s a dry, boilerplate assessment that hardly counts as “analysis.” I’ll be forgiven: There isn’t much to analyze at this point.
Despite 525bps of hikes in just 16 months, the US economy is still steaming along, a testament, some argue, to the notion that r-star has reset meaningfully higher. If that’s the case, rates aren’t as restrictive as you’d be inclined to believe, if they’re restrictive at all.
Whatever the case, the Fed is angling to engineer below-trend growth and they aren’t having much success. Although inflation has receded meaningfully, some worry the rest of the journey back down to 2% will be prohibitively arduous in the absence of slower hiring and spending. Retail sales data released on Tuesday showed nominal sales are still running hot, and although monthly job gains have slowed, they’re not exactly meager.
As Jerome Powell let on during last month’s press conference, Fed staff abandoned their recession call for 2023. “Since the emergence of stress in the banking sector in mid-March, indicators of spending and real activity had come in stronger than anticipated; as a result, the staff no longer judged that the economy would enter a mild recession toward the end of the year,” the minutes read. Staff still sees below-potential growth in 2024 and 2025, which should lead to “a small increase in the unemployment rate relative to its current level.”
Critics of the so-called “immaculate disinflation” narrative argue that a “small increase” in the jobless rate won’t likely be sufficient to control inflation, but so far, the Fed has succeeded in outsourcing much of the heavy lifting for cooler wage growth and labor market normalization to the headline JOLTS print, which is well off the highs. How sustainable that is remains an open question.
Notwithstanding “tentative” progress, “several participants” cautioned there’s no convincing evidence of “significant disinflationary pressures” in the core services ex-housing measure the Fed is watching for durable signs that inflation is on a path back to target. July’s CPI report provided more evidence in that regard, but hawks will probably need to see at least another two months of data before changing their minds about the likelihood of an additional rate hike.
“Participants stressed that the Committee would need to see more data on inflation and further signs that aggregate demand and aggregate supply were moving into better balance to be confident that inflation pressures were abating,” the account of the meeting went on, adding that “With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”
That’s the gist of it, right there — although risks are surely more balanced now than they’ve been at any time since the onset of rate hikes, there’s still an asymmetry. Core inflation is 2.5 times target and the unemployment rate is loitering near a 70-year low. Plainly, inflation is a bigger concern than joblessness, all “lagging indicator” protestations aside and even as the headline PCE overshoot has faded almost entirely.
And yet, as noted here at the outset, two non-voters would’ve kept rates unchanged last month. “They judged that maintaining the current degree of restrictiveness would likely result in further progress toward the Committee’s goals while allowing the Committee time to further evaluate this progress,” the minutes noted. There was also a reference to “the risk of an inadvertent overtightening” and the need to balance that against “the cost of an insufficient tightening.”
Officials discussed CRE issues, tighter bank lending standards, monetary policy lags and all the risks you’d expect to come up in an FOMC meeting. The problem (obviously) is that those are all known unknowns. It’s (almost) never those that get you. Traders deride policymakers for fighting the last war, but market participants are guilty of the same biases — they habitually assume the next crisis will look something like the last one.
Notably, the SOMA manager said RRP balances are likely to fall further “amid sustained projected Treasury bill issuance… and a possible further reduction in policy uncertainty that could incentivize money funds to extend the duration of their portfolios.” That’d be good news. RRP transformation to absorb bill issuance is the benign outcome. It mitigates reserve drain. Primary dealers, the minutes said, expected lower RRP balances and higher bank reserves by the end of the year than they did in June.
As for future rate decisions, it’s up to the data. “Uncertainty about the economic outlook remained elevated and policy decisions at future meetings should depend on the totality of the incoming information,” the minutes said, adding that Fed officials “expected that the data arriving in coming months would help clarify the extent to which the disinflation process was continuing and product and labor markets were reaching a better balance between demand and supply.”
