Highlights From the December FOMC Meeting Minutes
United in Division
https://www.federalreserve.gov/monetarypolicy/fomcminutes20221214.htm
Commentary
The first point to note was that the staff has pushed back the estimate for exiting inflationary territory by a year to the end of 2024. This measure is unlikely to weigh on policy, but it tells us just how close to the edge the Fed economists think their bosses are skating. With the staff estimating a zero output gap to be a full two years away they appear to be sending warning signals to the committee.
The minutes reveal a much more divided committee than might be assumed from the unanimous vote and Powell’s press conference. The discussion starts clear cut as everyone agrees inflation is too high and that the Fed is in no way to blame. When the discussion switches to the labor market the discussion becomes more contentious.
All agree that labor market supply and demand are imbalanced, but there are clear divisions on what the tradeoff between unemployment and inflation should be. Some on the committee see the tradeoff as a false bargain that will only lead to higher inflation, but the social justice members installed by Biden view the situation differently. Their views come through clearly in concerns about unemployment among specific demographic groups and the cost of overly restrictive monetary policy on “the most vulnerable groups”.
The committee continues to position itself to declare victory over inflation in 2023 while also justifying the need to keep the policy rate higher-for-longer. The ability of FOMC to “talk up” the back end of the yield curve will be key in determining the number and desirability of options available to the committee as 2023 unfolds.
Staff Review
-- Consistent with the decline in volatility, model-based measures suggested that a drop in term premiums accounted for much of the decline in Treasury yields over the period.
-- Output was expected to move below the staff’s estimate of potential near the end of 2024—a year later than in the previous forecast—and to remain below potential in 2025.
-- With inflation still elevated, the staff continued to view the risks to the inflation projection as skewed to the upside. [P]ossibility of a recession sometime over the next year [remains] a plausible alternative to the baseline.
Participants
-- [J]ob gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
-- The war and related events were contributing to upward pressure on inflation and were weighing on global economic activity. Against this background, participants continued to be highly attentive to inflation risks.
-- [E]conomic activity appeared likely to expand in 2023 at a pace well below its trend growth rate. [P]articipants expected that a sustained period of below-trend real GDP growth would be needed to bring aggregate supply and aggregate demand into better balance and thereby reduce inflationary pressures.
-- [G]rowth in consumer spending in September and October had been stronger than…previously expected, likely supported by a strong labor market and households running down excess savings accumulated during the pandemic.
-- Several participants remarked that budgets were stretched for low-to-moderate-income households... They also observed that many households were increasingly using credit to finance spending… Overall, participants assessed that there was considerable uncertainty around the consumer spending outlook.
-- Participants 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… Under an appropriately restrictive path of monetary policy, participants expected labor market supply and demand to come into better balance over time, easing upward pressures on nominal wages and prices.
-- In the context of achieving the Committee’s broad-based and inclusive maximum-employment goal, a number of participants commented that as the labor market moved into better balance, the unemployment rate for some demographic groups—particularly African Americans and Hispanics—would likely increase by more than the national average.
-- [T]he pace of increase for prices of core services excluding shelter—which represents the largest component of core PCE price inflation—was high. [T]his component of inflation has tended to be closely linked to nominal wage growth… [W]hile there were few signs of adverse wage-price dynamics at present…bringing down this component of inflation to mandate-consistent levels would require some softening in the growth of labor demand to bring the labor market back into better balance.
-- Participants generally noted that the uncertainty associated with their economic outlooks was high and that the risks to the inflation outlook remained tilted to the upside. Participants cited the possibility that price pressures could prove to be more persistent than anticipated, due to, for example, the labor market staying tight for longer than anticipated.
-- A number of participants judged that the risks to the outlook for economic activity were weighted to the downside. They noted that sources of such risks included the potential for more persistent inflation inducing more restrictive policy responses, the prospect of unexpected negative shocks tipping the economy into a recession in an environment of subdued growth, and the possibility of households' and businesses' concerns about the outlook restraining their spending sufficiently to reduce aggregate output.
-- In determining the pace of future increases in the target range, participants judged that it would be appropriate to take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
-- 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 percent, 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 other 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 percent and lead to an unnecessary reduction in economic activity, potentially placing the largest burdens on the most vulnerable groups of the population.
-- Participants generally indicated that upside risks to the inflation outlook remained a key factor shaping the outlook for policy. A couple of participants noted that risks to the inflation outlook were becoming more balanced. Participants generally observed that maintaining a restrictive policy stance for a sustained period until inflation is clearly on a path toward 2 percent is appropriate from a risk-management perspective.
Nice summary of the dec meeting. Cheers!