The minutes of the last meeting of the Federal Open Market Committee (FOMC) of the US Federal Reserve System (Fed), held in November 2022, were released a couple of days ago. The meeting was a joint meeting of the FOMC and the Board of Governors of the Fed, hence the number of participants were much larger than a usual FOMC meeting.
After the release of the minutes, the popular media narrative has been that the Fed officials and most participants are concerned about the likely adverse impact rate increases could have on financial stability and the economy; hence, we could “soon” see the Fed scaling down the pace of rate increases. The markets have obviously drawn a sense of comfort from this narrative and decided to move higher.
The minutes make some points that I found worth noting. From a plain reading of the minutes, I find that the participants were generally—
(a) Surprised by the resilience of the job market;
(b) Concerned about the persistence of the inflation and assessed the risk on the upside;
(c) Comfortable with the broad economic conditions which are presently indicating slower growth but no risk of recession;
(d) Comfortable with the anchored inflationary expectations;
(e) Confident that the monetary tightening will reflect on inflation and other economic conditions with a time lag;
(f) Inclined to keep the monetary policy “restrictive” for long;
(g) Focused on the final Fed rate that would be adequately restrictive, rather than the rate hiked per meeting; and
(h) Mindful of the market expectations and behaviour about the monetary policy direction and trajectory.
The media narrative of a slower pace of hikes (50bps in December meeting), seems to be driven by the following five mentions in the FOMC minutes:
1. The minutes noted that “Most respondents to the Open Market Desk’s surveys viewed a 50 basis point increase in the target range for the federal funds rate at the December meeting as the most likely outcome.”
2. “A number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the Committee’s goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate. In addition, a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate. A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability. The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding why such an assessment was important.”
3. “A few participants commented that slowing the pace of increase could reduce the risk of instability in the financial system.”
4. “Some participants observed that there had been an increase in the risk that the cumulative policy restraint would exceed what was required to bring inflation back to 2 percent. Several participants commented that continued rapid policy tightening increased the risk of instability or dislocations in the financial system.”
5. “There was wide agreement that heightened uncertainty regarding the outlooks for both inflation and real activity underscored the importance of taking into account the cumulative tightening of monetary policy, the lags with which monetary policy affected economic activity and inflation, and economic and financial developments.”
Interestingly, the media narrative generally ignored the following noting, that indicate lack of consensus on slowing the pace of hikes:
A. “A few other participants noted that, before slowing the pace of policy rate increases, it could be advantageous to wait until the stance of policy was more clearly in restrictive territory and there were more concrete signs that inflation pressures were receding significantly.”
B. “With monetary policy approaching a sufficiently restrictive stance, participants emphasized that the level to which the Committee ultimately raised the target range for the federal funds rate, and the evolution of the policy stance thereafter, had become more important considerations for achieving the Committee’s goals than the pace of further increases in the target range. Participants agreed that communicating this distinction to the public was important in order to reinforce the Committee’s strong commitment to returning inflation to the 2 percent objective.”
C. “Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerged that could impede the attainment of the Committee’s goals. Members agreed that their assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
D. “Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.”
In my view, the chances are high that the Fed may slow the pace of hikes from the December meeting; but the end rate may be higher than previously estimated. We may have decisively shifted to “higher for longer” from “lower for longer” rate scenario.
More on FOMC minutes next week.
