WASHINGTON–Minutes released from the Federal Reserve’s Open Market Committee meeting in mid-December show an acknowledgement that inflation appears to have begun easing, but not sufficiently enough to warrant an end to pushing rates up.
The minutes also offer insights into what members of the FOMC are expecting to see in 2023.
The minutes note that following several months of tightening, financial conditions eased over the period as “investor concerns about global risks edged lower and incoming data showed nascent signs of a moderation in inflationary pressures. Central bank communications signaling a slower pace of policy rate increases appeared to contribute to improved sentiment.”
In addition, the discussion at the Fed further found measures of implied volatility across financial markets declined somewhat from the elevated levels observed in October.
Regarding the outlook for inflation in the United States, the key measure both the Fed and markets are watching, “inflation compensation implied by Treasury Inflation Protected Securities declined over the period, responding to lower-than-expected consumer price index (CPI) data and a sizable drop in oil prices,” the minutes state. “However, the Desk survey-based measures of inflation expectations were little changed from the prior survey, suggesting that falling inflation risk premiums may have contributed to the moves. Both market- and survey-based measures continued to point to expectations for a moderation of inflation over the coming year.”
Monetary Policy Outlook
Regarding the outlook for monetary policy, the Fed said both market- and Desk survey-based measures indicated expectations for the Committee to maintain elevated policy rates through 2023.
“In the December survey, the median respondent's modal expectation for the path of the federal funds rate in 2023 shifted higher by 25 basis points relative to the November survey,” the minutes state. “The survey-based estimate of the expected policy path in 2024 continued to suggest a decline in the target range for the federal funds rate over 2024, little changed from the path anticipated in the November survey. In contrast, the market-implied path of the federal funds rate in 2024 shifted down by as much as ¾ percentage point over the period, likely reflecting declining risk premiums.”
Other Meeting Notes
Other notes from the FOMC minutes:
- Nominal wage growth continued to be elevated and remained above the pace judged to be consistent with the FOMC's 2% inflation objective. Average hourly earnings rose 5.1% over the 12 months ending in November, close to the pace recorded in the employment cost index of hourly compensation in the private sector over the 12 months ending in September.
- Consumer price inflation remained elevated but had eased in recent months. Total PCE price inflation was 6.0% over the 12 months ending in October, 0.3 percentage point below the September figure. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 5.0% over the 12 months ending in October, down 0.2 percentage point from its September reading.
- After expanding at a moderate pace in the third quarter, real PCE growth appeared to have picked up in the fourth quarter. In contrast, residential investment looked to be contracting sharply further, and growth in business fixed investment seemed to be slowing markedly, with tepid gains in equipment and intangibles spending and continued declines in nonresidential structures investment.
- After narrowing in the third quarter, the nominal U.S. international trade deficit widened in October.
- Credit continued to be generally available to businesses and households, but high borrowing costs appeared to weigh on financing volumes in many markets.
- Business loan originations continued to expand in October and November but at a slower pace than observed in previous months. C&I loans continued to grow in October and November but decelerated relative to the third-quarter pace, moderating the robust rate of growth observed earlier this year.
- Credit was readily available in the residential mortgage market for high-credit-score borrowers who met standard conforming loan criteria. Credit availability for households with lower credit scores was considerably tighter at levels comparable with what prevailed before the pandemic.
Staff Economic Outlook
Looking forward, the minutes note the forecast for U.S. economic activity prepared by the staff for the December FOMC meeting was not as weak as the November projection.
“Recent data suggested that real GDP growth in the second half of 2022 was stronger than previously expected, but economic growth was still forecast to slow markedly in 2023 from its second-half pace,” according to the minutes. “Broad financial conditions were projected to be somewhat less restrictive than previously assumed, as the effects of a higher path for equity values and a lower path for the dollar more than offset a higher medium-term trajectory for interest rates.
“Nevertheless, the forecast for U.S. real GDP growth through 2025 remained subdued,” the minutes continue. “The staff slightly lowered its outlook for potential output, reflecting a lower expected trend in labor force participation. Moreover, the staff assumed a slower pace of decline in the natural rate of unemployment over the near term in response to recent estimates suggesting that job-matching efficiency was not improving as fast as previously anticipated. With all these changes, 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. Likewise, the unemployment rate was expected to move above the staff's estimate of its natural rate near the end of 2024 and remain above it in 2025.”
Participants' Views on Current Conditions and Economic Outlook
According to the minutes, meeting participants remarked that, although real GDP appeared to have rebounded moderately in the second half of 2022 after declining somewhat in the first half, economic activity appeared likely to expand in 2023 at a pace well below its trend growth rate.
“With inflation remaining unacceptably high, participants 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,” the minutes show.
In their discussion of the household sector, the minutes show participants noted that growth in consumer spending in September and October had been stronger than they had previously expected, likely supported by a strong labor market and households running down excess savings accumulated during the pandemic.
“A couple of participants remarked that excess savings likely would continue to support consumption spending for a while,” the Fed reported. “A couple of other participants, however, commented that excess savings, particularly among low-income households, appeared to be lower and declining more rapidly than previously thought or that the savings, the majority of which appeared to be held by higher-income households, might continue to be largely unspent. Several participants remarked that budgets were stretched for low-to-moderate-income households and that many consumers were shifting their spending to less expensive alternatives. They also observed that many households were increasingly using credit to finance spending.”
Inflation Views
According to the minutes, with inflation still well above the Committee's longer-run goal of 2%, participants agreed that inflation was unacceptably high.
“Participants concurred that the inflation data received for October and November showed welcome reductions in the monthly pace of price increases, but they stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path,” the minutes state. “…Against this backdrop, all participants agreed that it was appropriate to raise the target range for the federal funds rate 50 basis points at this meeting and to continue the process of reducing the Federal Reserve's securities holdings.”