The minutes from the June 14-15, 2022 Federal Open Market Committee (FOMC) meeting showed that curtailing inflation remains of paramount importance to the Fed.
On the progression of economy, the Committee members noted that “overall economic activity appeared to have picked up after edging down in the first quarter. Job 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 energy prices, and broader price pressures.”
On the current acceleration in prices, the Committee stated that “inflation remained much too high and observed that it continued to run well above the Committee’s longer-run 2 percent objective, with total PCE prices having risen 6.3 percent over the 12 months ending in April.” Additionally, participants stressed concerns that May’s CPI print came in above expectations suggesting that inflation may be more persistent than originally thought.
On Russia’s invasion of Ukraine, members of the Committee stated that “the invasion and related events were creating additional upward pressure on inflation and were weighing on global economic activity.”
On the future pace of policy tightening, they stated that “an increase of 50 or 75 basis points would likely be appropriate at the next meeting.” Moreover, committee members stated that a more restrictive policy stance may be warranted if inflation continues to surprise to the upside.
Key Implications
The minutes revealed that reestablishing price stability remains the principle objective of the Fed, with consumer prices in May having surged to 8.6% from year-ago levels. The Russia-Ukraine conflict and recent COVID lockdowns in China, only add to the upside risk. Additionally, the labor market has continued to strengthen, with employment approaching pre-pandemic levels and the unemployment rate sitting at 3.6%, just 0.1 percentage points above its February 2020 level.
The aggressive commitment from the Fed to rein in inflation has prompted fears of a recession with some surveys showing that the probability of a recession occurring over the next 12-months has increased to 44%. These fears have also been reflected in U.S. Treasury yields, with the 10-year yield having declined almost 70 basis points from its mid-June highs. We expect the Fed to continue to act swiftly until inflation is comfortably trending towards its 2% target.
