However, the central bank reiterated its position that the Fed must adopt and maintain a restrictive policy to achieve the chief objective of price stability. Once policy has reached a restrictive level, it will need to be held there for a period.
This might have been emphasized as the Fed anticipated that the real Personal Consumption Expenditures (PCE) price index, a preferred measure of inflation, is poised to record “a modest gain” in the third quarter.
Despite fears of overtightening, several rate-setting committee members say the costs of doing too little to rein in rampant price inflation are too high, even if the efforts result in slower economic growth.
“Participants generally anticipated that the U.S. economy would grow at a below-trend pace in this and the coming few years, with the labor market becoming less tight, as monetary policy assumed a restrictive stance and global headwinds persisted,” the minutes read.
“Participants noted that a period of below-trend real GDP [gross domestic product] growth would help reduce inflationary pressures and set the stage for the sustained achievement of the committee’s objectives of maximum employment and price stability.”
At the same time, the economic outlooks of FOMC participants were high, and risks to their inflation outlook were weighted to the upside.
“Some participants noted rising labor tensions, a new round of global energy price increases, further disruptions in supply chains, and a larger-than-expected pass-through of wage increases into price increases as potential shocks that, if they materialized, could compound an already challenging inflation problem,” the minutes read. “A number of participants commented that a wage-price spiral had not yet developed but cited its possible emergence as a risk.”
The FOMC lowered its economic projections, forecasting GDP to grow at a tepid annualized pace of 0.2 percent in 2022 and 1.2 percent in 2023.
Overall, the minutes reiterated what many Fed officials have been saying in public for months: The central bank needs to raise interest rates and hold them there, higher for longer, until inflation begins to show signs of coming down.
A Bleak Economy?
During the FOMC policy meeting in September, committee members raised interest rates by 75 basis points, bringing the benchmark federal funds rate to a target range of 3–3.25 percent.Market analysts are worried that the institution’s efforts of quantitative tightening are beginning to seep into the broader economy, resulting in bleak monthly data.
Since the beginning of October, various metrics have been trending downward or falling short of market estimates.
Investors will be watching the Consumer Price Index (CPI) report for September on Oct. 13. The CPI is expected to ease to 8.1 percent year-over-year, however, the core inflation rate, which excludes the volatile energy and food sectors, is projected to advance to 6.5 percent.
“Data over the past month were mixed, but on balance increasingly suggest recession risk over the coming year,” Nick Reece, a portfolio manager at Merk Investments, wrote in a note. “The Conference Board’s Leading Economic Indicators (LEI) Index is down six months in a row and negative on a year-over-year rate of change basis.
“The outlook remains uncertain, with risks to economic growth clearly skewed to the downside.”
“Every six months they say this. Every six months, they look down the next six months and say what’s going to happen,“ Biden said. ”It hadn’t happened yet. It hadn’t ... I don’t think there will be a recession. If it is, it’ll be a very slight recession. That is, we’ll move down slightly.”
The U.S. economy is in the middle of a technical recession after it recorded back-to-back quarters of negative GDP growth.
And this isn’t boding well for the financial markets, either, according to Arthur Laffer Jr., president of Laffer Tengler Investments.
“Quite a bit of the current environment appears to be pricing in higher rates and lower growth and a fairly mild recession in the United States,” Laffer wrote in a recent note. “We expect a lot more volatility in markets for the remainder of the year as the inevitability of higher rates sinks in and the economic consequences become more pronounced. [Fed] Chairman Powell will not be a very popular person, but it seems his legacy is focused on fighting any resurgence of 1970s’ inflation in the United States at all costs.”
