July 06, 2022 | 15:26
Minutes of June 14-15 FOMC Meeting — Price Stability or Bust
The June 14-15 Fed confab was a watershed event for U.S. monetary policy. The Minutes show that policymakers “concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist.” For a “number” of participants, May’s CPI acted as a catalyst “solidifying the view that inflation would be more persistent than they had previously anticipated.” And with some measures of inflation expectations also moving up “many participants judged that a significant risk now facing the Committee was that elevated inflation could become entrenched if the public began to question the resolve of the Committee to adjust the stance of policy as warranted.”
Whether a participant was considered a hawk or a dove, there was uniformity in what was deemed necessary to address stubbornly high inflation readings and the risks they posed to Fed credibility. First, push policy rates up even more “expeditiously”, hence the extreme 75 bp action which was endorsed by all voters except for one (Kansas City President George favored a 50 bp move). For July 26-27, “an increase of 50 or 75 basis points would likely be appropriate”. And, keep pushing until rates are above the top of the 2%-to-3% range of neutral projections. This is what was meant by “restrictive stance”, a light tapping of the monetary brakes and its consequent risk of causing a recession. The key is that this policy destination was unanimously endorsed (corroborated by the Summary of Economic Projections), in part “because it would put the Committee in a better position to implement more restrictive policy if inflation came in higher than expected.”
Bottom Line: The Fed appears intent on tightening until there’s at least a ‘3 handle’ on policy rates. Once there, larger integers will be dictated by what happens on the inflation front. The Minutes portray a Fed that is not afraid to do whatever is necessary to restore price stability.