By Robert Eisenbeis, Ph.D.
As we approach the FOMC’s November meeting and the blackout period starting October 31 for participants’ public statements on monetary policy, we can expect to hear from a number of policymakers on how they view policy going forward after the release last Wednesday of the minutes of the most recent FOMC meeting.
Cleveland Fed President Mester, a non-voting FOMC participant, voiced her view shortly after the September meeting, stating that the projections that were released, calling for one more rate increase this year, with rates that might have to remain sufficiently restrictive to get inflation down to 2%, reflected her own views as well. That sentiment was echoed on October 12 by Boston Fed President Collins, a voting member this year. In contrast, Philadelphia Fed President Harker stated on October 16 that the Committee should not be thinking of increasing rates at this time. In contrast, FRB Minneapolis President Kashkari stated on September 27th that he wasn’t sure that rates were sufficiently high to tame inflation.
Dallas Fed President Logan, in a speech on October 9, stated that she felt that inflation remained too high but was a bit more circumspect and didn’t indicate her view on another rate increase at the upcoming meeting. Similarly, FRB New York President Williams, on September 29, noted that he felt that rates were about where they were needed to bring inflation down but did not state whether he felt another increase was required at the upcoming meeting.
So, there is clearly a wide range of views among reserve bank presidents on what might be needed at the upcoming FOMC. However, important insights can be gained by parsing the review of FOMC participants’ views of the economic situation contained in the recently released meeting minutes. The minutes contained an unusually lengthy and detailed discussion of participants’ assessment of the overall outlook, which was then broken down into discussions of the strength of the household sector, the solid condition of the business sector, favorable developments in labor markets, and moderating inflation pressures.
The discussion then turned to what was termed the “high degree of uncertainty surrounding the economic outlook,” fueled by the autoworkers’ strike, rising energy prices and their implications for the inflation outlook, and sources of downside risks to the expansion, including tightening credit conditions, the slowdown in China and its potential drag on global growth, and the possible US government shutdown.
Countering these downside uncertainties was concern about the upside resilience shown by the domestic economy. Adding to the uncertainty was worry over the effects that a government shutdown might have on data availability to assess economic developments, as well over recent volatility in the incoming data that required substantial adjustments, making the assessment of economic progress difficult.
In terms of the overall economic outlook, the minutes stated that participants saw the economy expanding at a solid pace and exhibiting resilience, but growth was expected to slow, in part due to the restrictive nature of policy. Turning to the household sector, consumer spending had continued to exhibit strength. That view was subsequently bolstered by the release of consumer spending data for September, which increased 0.7%.
At the same time, participants noted that certain households were coming under increasing pressure due to inflation, declining savings, and increased reliance upon credit, and the added pressure from the resumption of student loan payments. Again, that view was confirmed with the release of the September data, which showed an increase in delinquencies, especially in the auto loan sector.
As for the business sector, while activity was firm, some softening was noted. Among the sources of strength were the ability to hire and retain workers and a further improvement in supply chains. Concern was expressed that activity might be restrained by increased credit costs, but those costs were lower than had been previously feared, as the banking stress had passed.
Understandably, concern was expressed about the prolonged impacts of the auto strike, including lost production, disruption in auto parts production, and possible upward pressure on auto prices. The minutes then turned to a discussion of the labor market, which participants saw as tight but coming into better balance. Labor demand was moderating, with declines in job openings and quits and reductions in weekly hours.
One result of the continued tightness was a noted improvement in the participation rate, especially for women. As conditions improved, payroll growth moderated, but wage growth continued to outpace what was viewed as a rate consistent with the Committee’s 2% inflation target. On the inflation front, participants saw inflation slowing, but further progress is needed to be observed before inflation declines to a sustainable 2%. While food and energy prices continued to come down, little progress had been noted in core consumer services, except for housing.
These observations and the prospect for further progress are now clouded by the outbreak of violence in Israel and Gaza and the increases in energy and food prices that will surely materialize. Despite the considerable uncertainty about the outlook, participants viewed the current stance of policy as being appropriate, with at most one more rate increase possible, depending on the flow of incoming data. That view, combined with the view that the full effects of past rate hikes had not been realized, led to the conclusion that rates would have to remain high for some time yet.
The view was also expressed that the pace at which inflation continued to decline would impact the Committee’s position on the degree of restriction required and its duration. Interestingly, there was no mention in the discussion of the risks of either a recession or a “soft landing.” Right now, while the participants are committed to bringing inflation down to 2%, there is plenty of support for those who want to stand pat at the next meeting and those who want to proceed with another increase. Chairman Powell hinted during comments in a speech in New York on October 19 that he is leaning towards a pause. At this time, the odds seem to favor a pause and the timing of any further rate increases isn’t clear.
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