The minutes from the July 26-27, 2022 Federal Open Market Committee (FOMC) meeting showed that curtailing inflation remains of paramount importance to the Fed.
On the progression of the economy, the Committee members noted that “recent indicators of spending and production had softened. Nonetheless, 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 food and energy prices, and broader price pressures.”
The Committee also stated that “inflation remained unacceptably high and was well above the Committee’s longer run goal of 2 percent.” Additionally, participants noted that increases in inflation were broad based and that they have seen little evidence that inflation has begun to abate.
Members of the Committee stated that “the war and related events were creating additional upward pressure on inflation and were weighing on global economic activity.”
Committee members anticipated that “ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee’s objectives.” Nevertheless, the pace and extent of future policy tightening would depend on the prevailing macroeconomic backdrop.
For the first time FOMC members acknowledged that “the constantly changing nature of the economic environment and the existence of long and variable lags in monetary policy’s effect on the economy, there was also a risk that the Committee could tighten the stance of policy by more than necessary to restore price stability.”
Key Implications
The minutes confirmed that re-establishing price stability remains the principal objective of the Fed. The uncertainty surrounding the Russia-Ukraine conflict will only add to the upside risk. Additionally, the labor market has continued to strengthen, with employment having surpassed pre-pandemic levels and the unemployment rate on par with its February 2020 level. The Fed also acknowledged that their task is highly uncertain, and there is a risk that it could tighten rates by “more than necessary”.
Markets have been worried about exactly that risk. Recession fears have continued to mount, with some surveys showing that the probability of a recession within the next 12-months has increased to 50%. These fears have also been reflected in the spread between the U.S. 10-year and 2-year treasury yields, which remains in negative territory. We expect the Fed will continue to raise rates this year, before taking a pause to monitor the impacts of its actions on economic activity and inflation.
