August 17, 2023 (MLN): With U.S. inflation still well above the Committee's longer-run goal and the labor market remaining tight, most participants continue to view the prospect of significant upside risks to inflation as a potential trigger for further tightening of monetary policy, as revealed by the latest FOMC minutes of July.
Despite the ongoing resilience in economic activity and the enduring strength of the labor market, participants emphasized that there continue to be downside risks to economic activity and upside risks to the unemployment rate.
These risks include the possibility that the macroeconomic effects of the tightening in financial conditions since the beginning of last year could prove to be more substantial than initially anticipated.
On the other hand, a number of participants judged that, with the stance of monetary policy in restrictive territory, the risks to the achievement of the Committee's goals had become more two-sided.
It is crucial that the Committee's decisions strike a balance between the risk of unintentionally tightening policy too much and the cost of insufficient tightening.
Future Policy Actions
In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, members concurred that they will 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.
In addition, members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
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 emerge that could impede the attainment of the Committee's goals.
Members also agreed that their assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Staff Economic Outlook
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.
However, the staff continued to expect that real GDP growth in 2024 and 2025 would run below their estimate of potential output growth, leading to a small increase in the unemployment rate relative to its current level.
The staff continued to project that total and core PCE price inflation would move lower in the coming years.
Much of the step-down in core inflation was expected to occur over the second half of 2023, with forward-looking indicators pointing to a slowing in the rate of increase of housing services prices and with core nonhousing services prices and core goods prices expected to decelerate over the remainder of 2023.
Inflation was anticipated to ease further over 2024 as demand–supply imbalances continued to resolve; by 2025, total PCE price inflation was expected to be 2.2 percent, and core inflation was expected to be 2.3 percent.
Risks to the staff's baseline inflation forecast were seen as skewed to the upside, given the possibility that inflation dynamics would prove to be more persistent than expected or that further adverse shocks to supply conditions might occur.
Moreover, the additional monetary policy tightening that would be necessitated by higher or more persistent inflation represented a downside risk to the projection for real activity.
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Posted on: 2023-08-17T10:43:02+05:00
