EconoFACTS

February 22, 2023 | 14:38

FOMC Minutes: Smaller Doesn't Mean Fewer

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

The minutes of the last policy meeting suggest the FOMC is strongly committed to extending rate increases (yes plural) until it sees sustained progress on inflation. This progress needs to cut "across a broader range of prices". Falling goods prices and easing rents alone won't cut it; softer services inflation is now the focus of attention, along with a desire for looser labour markets and slower wage gains. Members remain "highly attentive to inflation risks".

But the minutes also suggest the bar to pivot back to a 50 bp hike is high. While a "few" members wanted to stick with this pace in February (a group that we now know includes Mester and Bullard, though they don't vote), "many" among the majority of participants who voted to shift down to 25 bps last meeting said that "a further slowing in the pace of rate increases would better allow them to assess the economy's progress toward the Committee's goals of maximum employment and price stability". To strengthen this point,"Almost all participants observed that slowing the pace of rate increases at the current juncture would allow for appropriate risk management as the Committee assessed the extent of further tightening needed to meet the Committee's goals." This means that while the Fed still sees upside threats to inflation, it's also becoming more mindful of recession risks. In fact, "some" members saw an elevated risk of recession this year.

A recent tightening in financial conditions should comfort the Fed. The minutes noted that "it was important that overall financial conditions be consistent with the degree of policy restraint that the Committee is putting into place in order to bring inflation back to the 2 percent goal". The recent spike in bond yields and slippage in equity values will weigh toward sticking with smaller rate hikes.

Bottom Line: The Fed is largely committed to moving at least twice more on rates, but in quarter point steps rather than bigger leaps.