US FOMC Minutes highlight concerns, participants brace for tightening

July 06, 2023 (MLN): The apparent consensus to maintain the policy rates was not as unanimous as initially portrayed, as some hawkish members appeared to be just biding their time, the June’s US Federal Open Market Committee (FOMC) minutes of the meeting showed yesterday.

Although, the vast majority of respondents to the Open Market Desk’s Surveys of Primary Dealers and Market Participants expected no rate change at June’s meeting.

However, there was significant dispersion across respondents, and respondents saw a clear probability of additional tightening at coming meetings.

Respondents’ average probability distribution for the level of the peak policy rate shifted higher since the May meeting and respondents on average assigned about 60% probability to the peak being above the current target range (i.e. 5-5.25%).

Moreover, it showed that the Consumer price inflation remained elevated. Despite total PCE price inflation easing.

But the recent readings for core PCE price inflation, which excludes changes in consumer energy prices and most consumer food prices and usually provides a better signal about future inflation than the more volatile total inflation measure, were little changed.

In May, the 12-month change in the consumer price index (CPI) was 4.0%, and core CPI inflation was 5.3%, only slightly below its January reading.

The trimmed mean measure of 12-month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 4.8% in April.

Future Outlook

Going forward, the expected path of the policy rate implied by market quotes moved up notably over the intermeeting period.

A straight read of federal funds futures rates suggested that market participants expected that the federal funds rate would be roughly flat over the course of the rest of this year.

The year-end expected rate was about 70 basis points higher than the year-end expectation before the May FOMC meeting.

In assessing the economic outlook, most participants noted that real GDP growth had been resilient in recent quarters. Participants generally judged that growth would be subdued over the remainder of this year.

With inflation well above the Committee’s longer-run 2% objective, participants expected that a period of below-trend growth in real GDP and some softening in labor market conditions would be needed to bring aggregate supply and aggregate demand into better balance and reduce inflationary pressures sufficiently to return inflation to 2% over time.

In discussing the policy outlook, all participants continued to anticipate that, with inflation still well above the Committee’s 2% goal and the labor market remaining very tight, maintaining a restrictive stance for monetary policy would be appropriate to achieve the Committee’s objectives.

Copyright Mettis Link News