FOMC Members Raised Recession Odds, Warned ‘Uncertainties’ in Inflation Outlooks, Minutes Reveal

Federal Reserve Chair Jerome Powell addresses reporters during a news conference at the Federal Reserve Building in Washington, on Feb. 1, 2023. Jonathan Ernst/Reuters

Minutes from the latest Federal Open Market Committee (FOMC) policy meeting revealed that the policy-making arm of the central bank believes the odds of a recession occurring in 2023 are higher.

While inflation is moderating and global economic growth prospects have bolstered market sentiment, there is a growing number of FOMC participants who are anticipating “subdued growth or a mild recession” this year. But there are still “notable uncertainties ahead,” such as the potential for persistent inflation and the possibility of “a deeper downturn.”

According to the minutes, participants acknowledged that inflation had eased in the last three months, but they purported that they needed to see more progress. In addition, the rate-setting committee members warned that a prolonged tightness in the labor market would add to upward inflation pressures.

“Participants noted that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases, but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path,” the minutes stated.

While the decision was unanimous in raising the benchmark federal funds rate by a quarter point, several participants argued for a half-point increase.

“The participants favoring a 50 basis-point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way,” the minutes said.

Still, the FOMC members agreed that monetary policy needs to remain restrictive until they are confident that inflation would fall to its 2 percent target rate.

On the issue of the U.S. debt ceiling, several FOMC participants noted that an extended debt limit process would pose risks to the national economy and financial system.

“In subsequent months, uncertainties associated with the debt limit could also be important,” the minutes noted. “In particular, the Treasury could increase bill issuance to rebuild TGA balances once the debt limit is lifted, reducing reserves and potentially lifting money market rates.” (TGA refers to the Treasury General Account.)

Financial markets were relatively flat following the release of the Fed minutes.

U.S. Treasury yields maintained their losses. The U.S. Dollar Index (DXY), a measurement of the greenback against a basket of currencies, was still up above the 104.30 mark.

Appetite for Higher Rates

Following the higher-than-expected Consumer Price Index (CPI) earlier this month, and price pressures showing signs of renewed growth in certain sectors of the economy, there has been a growing appetite for larger rate hikes, causing investors to shift their forecasts on interest rates.

While speaking during a recent interview with CNBC, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, noted that “we need to raise rates aggressively to put a ceiling on inflation.”

“So, we’re having to let inflation guide policy rather than our models guide policy. And that’s challenging. It’s challenging because there are lags that you’re well aware of,” adding that it might take two years more years to bring inflation back to the central bank’s 2 percent target rate.

James Bullard, president of the Federal Reserve Bank of St. Louis, championed more aggressive rate hikes now to kill inflation successfully without triggering a recession.

James Bullard, president of the Federal Reserve Bank of St. Louis, speaks during an interview with AFP in Washington, on Aug. 6, 2019. Alastair Pike/AFP via Getty Images

“It has become popular to say, ‘Let’s slow down and feel our way to where we need to be.’ We still haven’t gotten to the point where the committee put the so-called terminal rate,” he told CNBC on Wednesday. “Get to that level and then feel your way around and see what you need to do. You’ll know when you’re there when the next move could be up or down.”

This comes one week after Bullard revealed to reporters after a speech in Jackson, Tennessee, that he and Cleveland Fed Bank president Loretta Mester supported a half-point rate hike at this month’s FOMC meeting.

Mester informed a Global Interdependence Center and the University of South Florida Sarasota-Manatee event that she noticed a “compelling economic case” for a 50 basis-point increase.

“At this juncture, the incoming data have not changed my view that we will need to bring the fed funds rate above 5 percent and hold it there for some time,” she said in prepared remarks.

Looking ahead to next month’s policy meeting, the market widely anticipates that the central bank will pull the trigger on a second consecutive quarter-point rate hike, according to the CME FedWatch Tool. However, expectations are beginning to shift amid improving economic conditions and elevated inflation.

The S&P Global Purchasing Managers’ Index (PMI) readings came in better than market estimates in February, with the Composite and Services PMIs turning positive for the first time since June.

On the inflation front, the CPI rose 0.5 percent month over month, and the Producer Price Index (PPI) climbed at a higher-than-expected pace of 0.7 percent between December and January.