Federal Reserve Chairman Jerome Powell in June 2022.
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Minutes from the Federal Reserve’s June 14-15 meeting reveal central bankers’ growing concern about inflation and plans to adopt a tighter policy stance in order to reduce rapidly rising prices. The minutes read falconry. But the major stock indexes rose after the session as investors looked at economic developments since the Fed’s last meeting and bet that slowing economic growth will ultimately limit the amount of tightening the central bank needs to do. Both the S&P 500 and Nasdaq 100 gained about 1% within an hour of the release. Members of the Federal Open Market Committee, the Fed’s policymaking arm, agreed in June that a 0.5 percentage point or 0.75 percentage point hike in interest rates would likely be appropriate in July after agreeing to a 0.75 percentage point hike in June. That was the biggest rate hike since 1994, prompted by a tepid CPI and a surprise rise in consumer inflation expectations ahead of the June meeting. These two data points dashed hopes that inflation had already peaked and raised alarm bells that inflation was consolidating. Investors already knew the Fed was between a half-point and another three-quarter hike for July. Fed Chairman Powell has suggested the base case is the former, though he has not taken another 0.75 basis point hike off the table. Traders have priced in about a 90% chance of a 0.75 point increase in July, and the minutes should not change that expectation. Where the question remains is what will happen after July. On the face of it, the latest meeting minutes show the Fed will remain hawkish, with hikes of 0.5 percentage points the latest moves of 0.25 points and officials suggesting they will err on the side of too much tightening. “Participants agreed that the economic outlook justified a shift to a more restrictive policy stance and acknowledged the possibility that an even more restrictive stance might be appropriate if elevated inflationary pressures persisted,” the minutes said. But one of the big reasons for the 0.75-percentage-point gain was a data point that has since been revised lower, possibly alleviating some of the panic evident in the minutes. This comes as commodity prices fall, further raising hopes that inflation – at least on the goods side of the economy – has been overcome. As for the revised data point that was key to the outsized increase: officials expressed particular concern about the University of Michigan’s 5-10 year measure of inflation expectations in the university’s monthly consumer confidence report. That measure jumped from 3% to 3.3% just before the June meeting. “Many participants expressed concern that long-term inflation expectations could begin to fall to levels inconsistent with the 2% target,” the minutes said, adding that those participants said that if inflation expectations did not established, it would be more costly to reduce inflation to the target. Immediately after the June meeting and the 0.75 point decision, however, the University of Michigan released its revised report, with the 5-10 year inflation expectation revised to 3.1%. He noted that the revised reading was back in the 2.9% to 3.1% range that has been in place for the past year or so. However, inflation expectations remain well above the Fed’s 2% target. And while commodity prices are falling, rising mortgage rates and warnings from companies, including retailers, are supporting hopes that inflation is finally over, one thing is peaking and another is falling. Consider what Goldman Sachs economists said this week. The annual core CPI — which excludes food and energy — will accelerate again this summer, to 6.3% in September from 6% in May, they say. By the end of the year, it will remain at 5.5%, they add, which is almost three times the target annual inflation rate. Markets have already shifted their focus from inflation to growth — more so after June’s big increase and ahead of a likely similar increase this month. It is unclear when the Fed will shift its focus and whether inflation will remain high even as growth slows. The June minutes give no indication that officials are beginning to waver. But things move quickly and the minutes have already passed three weeks. “What markets want to hear now is what the Fed has in mind if economic data releases continue to signal a deeper, more severe recession without a commensurate easing of inflation,” says Quincy Krosby, chief equity strategist at LPL Financial . What markets are hoping for is that by the next meeting, inflation will fall, indicating that Fed policy is working, he says. For that, investors will have to keep waiting. At this point, economists expect the June CPI report, to be released on July 13, to show that overall prices rose another 8.6% from a year earlier. Write to Lisa Beilfuss at [email protected]
