Fed minutes hawkish: warning of significant upside risks to inflation, the two supported no rate hikes in July and no longer expected recession this year

According to the minutes of the Fed meeting released on Wednesday, August 16, Eastern time, the Fed policymakers warned that there are higher upside risks to inflation, which may force them to raise interest rates further. However, Fed staff are more optimistic about the economy and no longer expect a recession this year.

Moreover, as with the June meeting, despite the unanimous vote of the most recent Fed meeting in July, the minutes exposed differences among policymakers over rate hikes, showing that a small number of officials were not in favor of raising rates. Nick Timiraos, a journalist known as the "new Fed news agency" and known as the "mouthpiece of the Fed", commented that while most officials supported a rate hike last month, some Fed officials found that the risk of raising rates could be too high increased, highlighting the Fed's growing caution about further rate hikes.

Media commented that the minutes of this meeting are more hawkish than the previous minutes in June. In the minutes, the number of dovish statements remained roughly unchanged, with hawkish statements being the most since January.

Most policymakers still believe that there are significant upside risks to inflation, which may necessitate further rate hikes

The minutes show that at the July meeting, participants discussed a variety of considerations that could influence future decision-making when it comes to risk management. The minutes read:

With inflation still well above the Fed's long-term target and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.

Some participants argued that even if economic activity is resilient and the labor market remains strong, there are still downside risks to economic activity, as well as upside risks to unemployment, including the possibility that financial conditions will have a greater macroeconomic impact than expected.

A number of participants judged that because the monetary policy stance is already in a restrictive range, there are two risks to the Fed achieving its inflation target, on the one hand, the risk of excessive tightening, and on the other hand, the risk of insufficient tightening, and the key is to balance these two risks.

Many believe that even when interest rates are cut, they may not stop shrinking the balance sheet

In the July meeting statement, the Fed's statement on the size of the balance sheet (balance sheet reduction) remained unchanged as in previous meetings, saying that it proceeded as planned. In a press conference after the July meeting, Fed Chairman Jerome Powell said that interest rate adjustments and balance sheet reduction are independent, and the Fed may cut interest rates while reducing its balance sheet.

The minutes of this meeting show that, in discussing the policy outlook, all participants agreed that it would be appropriate to continue the process of balance sheet reduction in line with the previously announced plan. Immediately after the minutes wrote, many people believe that the Fed may not stop shrinking its balance sheet when it cuts interest rates:

Multiple (A number of) participants noted that the balance sheet reduction does not necessarily end when the (FOMC) committee finally begins to lower the target range for the federal funds rate.

Almost all policymakers see July as appropriate for a 25 basis point rate hike Several in favor of keeping rates unchanged

The July Fed meeting announced a 25 basis point rate hike as expected, and the statement after the meeting showed that the entire voting committee of the Fed's monetary policy committee, the FOMC, was unanimously in favor of such an action.

In the minutes of Wednesday's meeting, "almost all" participants decided that a 25 basis point rate hike at the July meeting was appropriate. Participants noted that this would put the monetary policy stance further in economically restrictive territory, helping to reduce supply-demand imbalances within the economy and helping to restore price stability. Immediately afterwards, the minutes read:

Two (A couple of) participants said they favored keeping the target range for federal funds unchanged, or that they could have supported such a proposal. They judged that maintaining the current level of restrictions could allow further progress on the objectives of the (FOMC) Committee and allow time for the Committee to further assess that progress. ”

Wall Street News has mentioned that the dot plot of the interest rate outlook released after the June meeting shows that a total of 12 Fed officials, who make up two-thirds of all those who provide interest rate expectations, expect interest rates above 5.5% this year, implying at least two 25 basis point rate hikes this year after June. At the July meeting, two people supported standing still, accounting for only 11% of the total 18 people who made interest rate decisions.

Decisions depend on all data Data for the coming months are valuable for judging the extent of the likely additional tightening

The statement of the July Fed meeting did not rule out the possibility of future rate hikes, leaving the door open to follow-up. The biggest change in July compared to the June post-meeting statement was that it said it would continue to assess new information and its impact on monetary policy in terms of interest rate guidance.

The minutes of the last meeting in June showed that when discussing the monetary policy outlook, almost all participants judged that further rate hikes within the year were appropriate when looking at the economy.

In the minutes of this meeting, the policy outlook was discussed without mentioning the above judgment of interest rate hikes, but highlighted the importance that Fed policymakers attach to future data, reiterated that future decisions depend on all data, and added a new mention that data is valuable in judging the extent to which further tightening may be appropriate. The minutes read,

All participants continued to agree that in order for inflation to reach the Fed's target for some time, it is critical that the monetary policy stance be sufficiently restrictive. They noted that the economic outlook remains highly uncertain. They agreed that decisions at future meetings should depend on all future information and its impact on the economic outlook and risk balance.

Participants expect the data coming in the coming months to help clarify the extent to which the decline in inflation is persistent, and the extent to which products and labor markets have reached a better supply-demand balance. This information is valuable in determining the extent to which additional tightening might be appropriate for inflation to return to 2% over time.

In terms of communications, participants stressed the importance of communicating to the public the way Fed policy relies on data. Participants also stressed the importance of communicating as clearly as possible the Fed's policy reliance on data, and the importance of a firm commitment to reducing inflation to 2%.

Staff no longer expect a mild recession this year PCE inflation is expected to fall to 2.2% in 2025 Inflation forecasts have upside risks

The minutes of the last meeting in June showed that Fed staff, like the previous two meetings in March and May, still expected a mild U.S. recession this year, but in June they believed that the probability of avoiding a recession was almost as likely as a mild recession.

The minutes of the meeting showed that the economic forecasts of Fed staff in July were stronger than those for June. The minutes read:

Since the pressure on the banking sector in mid-March (US), indicators of spending and actual activity have been stronger than expected. As a result, staff no longer judge that the economy will enter a mild recession before the end of the year. But staff continue to expect real GDP growth in 2024 and 2025 to be lower than their estimated potential output growth, resulting in a slight increase in unemployment from current levels.

On the inflation front, staff continue to expect headline and core PCE price inflation to decline over the next few years. A large part of the decline in core inflation is expected to occur in the second half of this year, and forward indicators suggest that the price of property services will slow down, and the price of core services and core commodity prices excluding properties is expected to decelerate. As the supply-demand imbalance continues to ease, inflation will slow further next year.

Staff expect headline and core PCE inflation to reach 2.2% by 2025, with core inflation expected to reach 2.3%, slightly above the Fed's target of 2%.

Staff noted that their baseline forecasts for real economic activity are at risk of bias to the downside, as the Fed is bound to increase tightening when inflation rises or inflation persists, so baseline projections for actual activity pose a downside risk; Given that high inflation may persist longer than expected, or that adverse supply-side shocks are likely, their baseline inflation forecasts are at risk of skewed to the upside.

Stressing that inflation is unacceptably high Further evidence of lower inflation is needed Be wary that the impact of tighter bank credit could be greater than expected

In evaluating the economy, participants agreed that economic activity has been expanding at a moderate pace, the minutes show. The labour market remains very tight, with strong job growth in recent months and unemployment remaining low, but there are persistent signs that supply and demand in the labour market are getting a better balance.

Participants also noted that tighter credit conditions facing households and businesses are a source of economic headwinds that could weigh on economic activity, hiring and inflation. However, the extent of these impacts remains uncertain.

On inflation, the minutes wrote that while inflation has eased since the middle of last year, it is still well above the FOMC's long-term target of 2%, and participants remain firmly committed to reducing inflation to 2%. Participants stressed that inflation remains unacceptably high and that further evidence is needed to give them confidence that inflation is clearly on track to return to the 2% target.

Several participants argued that there has not been significant downward inflationary pressure on the prices of core services other than housing.

In discussing upside risks to inflation, participants cited recent improvements in supply chains, the failure of the downward trend in commodity prices to continue, the failure of aggregate demand to slow enough to restore price stability, the possibility that high inflation may be more persistent, or the decoupling of inflation expectations.

In terms of downside risks to economic activity and inflation, participants took into account that cumulative monetary tightening could lead to a larger-than-expected slowdown and that the impact of tighter bank credit conditions could be greater than expected.

Participants went on to believe that in order to achieve a better balance between aggregate supply and aggregate demand, and to reduce inflationary pressures to 2%, it will take some time for real GDP growth to be below trend and a weak labor market.

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