According to the minutes, committee members said the first-quarter economic construction offered “little signal about subsequent growth,” noting that they think real gross domestic product would expand “solidly” in the second quarter.
Inflation risks still captured the Fed’s attention as officials said they’ve been “highly attentive” to the issue. FOMC members said the central bank needs to shift monetary policy toward a more “restrictive” position “depending on the evolving economic outlook and the risks to the outlook.”
The minutes noted that the institution is concerned that the Ukraine–Russia military conflict and China’s COVID-19 lockdowns pose “heightened risks” to economic recovery. The FOMC stated that there will be challenges to restoring price stability and facilitating a strong labor market. These developments and their “implications for the U.S. economy were highly uncertain.”
FOMC participants acknowledged the financial strain that households are experiencing because of 40-year high inflation.
“Participants observed that inflation continued to run well above the Committee’s longer-run goal and that inflation pressures were evident in a broad array of goods and services,” the minutes read. “Various participants remarked on the hardship caused by elevated inflation and heightened inflation uncertainty—including by eroding American families’ real incomes and wealth and by making it more difficult for businesses to make production and investment plans. They also pointed out that high inflation could impede the achievement of maximum employment on a sustained basis.”
Ultimately, according to Fed policymakers, the U.S. economy is “very strong,” the labor market is “extremely tight,” and inflation is “very high.”
Most meeting participants endorsed 50-basis-point rate hikes at the next two meetings. They also supported efforts to trim the central bank’s $9 trillion balance sheet, and others noted that it would be appropriate to think about sales of mortgage-backed securities.
The Fed has agreed to cut the balance sheet by trimming $47.5 billion per month for the next three months, including $30 billion for Treasury securities and $17.5 billion for agency mortgage-backed securities. In September, the central bank plans to increase the pace to $95 billion per month.
“To ensure a smooth transition, the Committee intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves,” the minutes read. “Once balance sheet runoff has ceased, reserve balances will likely continue to decline for a time, reflecting growth in other Federal Reserve liabilities, until the Committee judges that reserve balances are at an ample level.”
The U.S. stock market rose after the minutes were published as investors observed that the Fed officials remain cautious about tightening monetary policy too much. The Dow Jones Industrial Average gained 0.7 percent, the S&P 500 rose by 1 percent, and the Nasdaq Composite Index jumped by 1.5 percent in afternoon trading.
What Experts, the Fed Are Saying
Prior to the release of the FOMC minutes, investors had been monitoring several subjects, according to Thomas Urano, managing partner at Sage Advisory.According to Urano, the market was monitoring any mentions of tightening financial conditions, recognition that the market has been doing the central bank’s “heavy lifting,” and discussions of a potential rate hike pause later this year amid a global economic slowdown.
Regardless of what was revealed in the minutes, Bryce Doty, senior portfolio manager at Sit Investment Associates, doesn’t believe traders have much faith in today’s economic environment.
“Investors are sensing this economic train wreck, and it’s no surprise many are fleeing the stock market,” he wrote in a research note.
“The question whether we can execute a soft landing or not—it may actually depend on factors that we don’t control,” the Fed chair said. “There are huge events, geopolitical events going on around the world, that are going to play a very important role in the economy in the next year or so.”
Atlanta Fed Bank President Raphael Bostic urged the central bank to be more cautious moving forward.
Because of the growing number of uncertainties, from the military conflict in Eastern Europe to supply constraints, Bostic urged monetary policymakers to “be mindful of those uncertainties and proceed carefully in tightening policy.”
An increasing number of officials are split on the size of rate hikes throughout the rest of 2022. Some want to sustain the 50-basis-point rate hikes, while others assert that the path to a neutral rate should be slowed down to a quarter-point hike.
“We have to get inflation under control. And that means moving the interest rate up. We have to move it up at a pace that will get that inflation under control,” she said without ruling out a 75-basis-point jump in the benchmark fed funds rate.
“We have to get inflation under control, and I think we have a good plan to do so,” Bullard said. “Fifty basis points is a good plan for now. As always, we have to pay attention to incoming data on the economy and on inflation. You can never make ironclad promises in this business, but we will see how this goes.”
If the Fed front-loads interest rate increases and inflation is finally brought under control, the FOMC can start trimming the benchmark policy rate again, he said.
In his interview with Fox Business, Bullard noted that a recession would only transpire if “there’s some really large shock,” but said he doesn’t see one forming in the near term.
The interest-rate futures market had been penciling in a rate cut in the second half of 2023, suggesting that investors believe that the Fed would attempt to respond to economic weakness if it can successfully grapple with inflation.
Despite all of the Fed’s efforts, Doty said the central bank will exacerbate the many underlying issues in the post-pandemic U.S. economy, including more shortages and higher prices.
“The Fed will likely get half of its wish and push the country into a recession but without meaningfully eliminating shortages and most likely making them worse,” he said. “Unless, of course, our bodies no longer need as much nourishment to survive and so forth.”
