EconoFACTS

May 24, 2023 | 14:45

FOMC Minutes: What's Inflation Got To Do With It?

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

The FOMC Minutes from the May 2-3 meeting were released this afternoon. Remember that one? When the Federal Reserve hiked rates 25 bps to 5.125%, then indicated a likely policy pause. But it seemed that any pause would be a hawkish one, as Fed Chair Powell declared during the Press Conference that rate cuts would be "inappropriate".

Judging by the Minutes, the Governing Council was not all ECB-like, in the sense that there was only one way to go and that was up. Yes, job gains had been "robust"; the jobless rate was still "low"; the banking system was "sound and resilient"; Q1 economic growth was "modest"; and consumer spending had been "strong" at the start of the year but is expected to be "subdued". And, further to the labor market, it was still "very tight" but the imbalance was starting to "ease". Yet, inflation was "elevated".

There was one notable conditionality that the Fed was watching. According to "some" of the participants, they need "a further easing in labor market conditions" to help lower inflation. And on that front, most participants saw rising downside growth risks (is that a double negative?) or, put another way, more downside risks. And, almost all saw upside inflation risks. There was "uncertainty" over further rate hikes.... participants were divided or split over the path of rates.... more favored a pause as the extent of potential hikes had become less certain. Even Governor Waller, on the wires earlier today, sounded uncertain. One thing is for sure... inflation was still "unacceptably high".

So, there is still alot of uncertainty among policymakers. And that is one of the reasons why they "emphasized the importance of communicating to the public the data-dependent approach" and "the vast majority ....commented that the adjusted language in the post-meeting statement was helpful".

What does this all mean? Keep watching key indicators such as consumer spending and jobs and inflation. Continued strength would push for another hike down the road. Of course, if there is no agreement on the debt ceiling, then other problems would need attention.