August 16, 2023 | 15:36
FOMC Minutes (July 25-26) — Rate Hike Door Still Open
The Minutes from the FOMC’s confab on July 25-26 showed that the Fed is still open to raising policy rates again if the economic data indicate that further tightening is warranted. Although a “couple” of non-voters were in the pause camp for July as well, “almost all participants judged it appropriate to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent at this meeting.”
Economic resiliency was a theme in both the staff’s presentations and participants’ observations. Among the latter, there seems to be sense that as long as economic resiliency doesn’t derail disinflation, the Fed won’t be overreacting to upside economic surprises. However, the Fed is still gunning for “a period of below-trend growth in real GDP and some softening in labor market conditions as needed to bring aggregate supply and aggregate demand into better balance and reduce inflation pressures sufficiently to return inflation to 2 percent over time.” And we’re not there yet… Annualized real GDP growth was 2.4% in Q2 (the fourth consecutive quarter above 2%) but “a gradual slowdown in economic activity nevertheless appeared to be in progress, consistent with the restraint placed on demand by the cumulative tightening of monetary policy since early last year and the associated effects on financial conditions.”
On the labour market, “although growth in payrolls had slowed recently, it continued to exceed values consistent over time with an unchanged unemployment rate” and nominal wages were growing at rates inconsistent with restoring price stability. In addition to sustained sub-2% real GDP growth, “further progress toward a balancing of demand and supply in the labor market was needed”.
If meaningful progress is made on both fronts, September’s likely rate hike skip could morph into a more permanent pause. But, “with inflation still well above the Committee's longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”