Macro Flash

Macro Flash: Key takeaways from the FOMC June Meeting Minutes

Assessment of market participants expectations

“Over the period, market participants focused on data showing lower employment growth and higher inflation readings than had been expected. The median 2021 core personal consumption expenditures (PCE) inflation forecast from the Open Market Desk’s Survey of Primary Dealers jumped nearly 1 percentage point from the previous survey. However, median forecasts for 2022 and 2023 each rose less than 0.1 percent, suggesting expectations for inflationary pressures to subside.”

In addition, ” Inflation compensation as measured by five-year breakeven rates on Treasury Inflation-Protected Securities peaked in mid-May at the highest level in more than a decade, but the increase was driven almost entirely by higher inflation compensation at short horizons. Indeed, one-year-forward inflation compensation at horizons beyond a year was relatively stable.

“The median respondent expected purchases to end in the fourth quarter of 2022. The Desk’s survey measures of the expected path of the target federal funds rate were also fairly steady, and the median respondent continued to expect the first target rate increase to occur in the third quarter of 2023.”

Participants’ Views on the Economic Outlook

Members judged that the economic outlook had continued to improve and that the most negative effects of the pandemic on the economy most likely had occurred. 

However, “Participants generally noted that the path of the economy would depend significantly on the course of the virus. Progress on vaccinations would likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remained.

“A number of participants noted that the labor market recovery continued to be uneven across demographic and income groups and across sectors. Some participants remarked that some temporary factors like concerns about the virus, childcare responsibilities, and expanded unemployment insurance benefits were making people either less able or less inclined to work in the current environment. However, the impact of these factors is likely to fade away as more schools reopen and as the expanded insurance benefits expire.

Regarding inflation, ” participants remarked that the actual rise in inflation was larger than anticipated, with the 12-month change in the PCE price index reaching 3.6 percent in April. They attributed the upside surprise to “more widespread supply constraints in product and labor markets than they had anticipated and to a larger-than-expected surge in consumer demand as the economy reopened. “

Looking ahead, participants generally expected inflation to ease as the effect of these transitory factors dissipated, but several participants remarked that they anticipated that supply chain limitations and input shortages would put upward pressure on prices into next year.

A substantial majority of participants judged that “the risks to their inflation projections were tilted to the upside because of concerns that supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed.Several participants expressed concern that longer-term inflation expectations might rise to inappropriate levels if elevated inflation readings persisted. Several other participants cautioned that downside risks to inflation remained because temporary price pressures might unwind faster than currently anticipated.

Several participants highlighted, however, that low interest rates were contributing to elevated house prices and that valuation pressures in housing markets might pose financial stability risks.”

Participants’ assessment of the stance of monetary policy

A few participants mentioned that they expected the economic conditions set out in the Committee’s forward guidance for the federal funds rate to be met somewhat earlier than they had projected in March. Several participants emphasized, however, that uncertainty around the economic outlook was elevated and that it was too early to draw firm conclusions about the paths of the labor market and inflation. In their view, this heightened uncertainty regarding the evolution of the economy also implied significant uncertainty about the appropriate path of the federal funds rate. 

Members agreed that it would be appropriate for the Federal Reserve to continue to increase its holdings of Treasury securities by at least $80 billion per month and agency MBS by at least $40 billion per month until substantial further progress had been made toward the Committee’s maximum-employment and price-stability goals.

In light of incoming data, some participants mentioned that “they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated.However, on the other side, “some participants saw the incoming data as providing a less clear signal about the underlying economic momentum and judged that the Committee would have information in coming months to make a better assessment of the path of the labor market and inflation“.

” In coming meetings, participants agreed to continue assessing the economy’s progress toward the Committee’s goals and to begin to discuss their plans for adjusting the path and composition of asset purchases.”

The FOMC statement was approved unanimously.