OPINION
Market Rating Before FOMC MeetingJan 31
FOMC Minutes: Monetary Tightening Will Continue Even If Labor Market Slows Down
In the global markets, yesterday, eyes were on the minutes of the Federal Open Market Committee's (FOMC) monetary policy meeting dated September 20 - 21. The minutes published gave many important messages in terms of asset pricing.
As it will be remembered, at the 20-21 September meeting, the bank increased the interest rate by 75 basis points for the third time in a row, increasing the federal fund target to the range of 3.25-3.50%. In addition, it was announced that the balance sheet contraction would be accelerated as planned in September, and within this framework, mortgage-backed securities would be reduced by $35 billion per month and treasury securities by $60 billion per month.
One Step Behind: In the Economic Projections Report, based on the expectations of the FED Committee members at the meeting, the gross domestic product forecast (GDP) for 2022 was reduced from 1.7% to 0.2%, while the PCE inflation expectation was increased from 5.2% to 5.4%. In this period, the interest rate forecast increased from 3.4% to 4.4%.
Looking at the meeting minutes, it was underlined that inflation continued to rise due to supply-demand imbalances related to the coronavirus pandemic and the spread of food and energy prices to a broader base with the Russo-Ukraine war while it was reflected that the war and related events put additional pressure on them.
While it was written that many Committee members decided that they should adopt and maintain a more restrictive policy stance to achieve the target of reducing high inflation, it was stated that they increased their assessments of the interest rates required to reach the 2% inflation target.
In the minutes, in which it was emphasized that the cost of taking too few measures to reduce inflation most likely outweighs the cost of taking too many measures, they stated that the latest inflation data was above expectations in general, and accordingly, inflation fell more slowly than expected.
Stating that they expect inflationist pressures to continue in the near term, FOMC members reiterated their strong commitment to returning to 2% inflation targets, and many officials emphasized the importance of staying on this course for a while, even if the labor market slows down.
While it was noted that the participants thought that supply and demand imbalances in the labor market would gradually decrease and unemployment rates could increase a little more due to the tight stance, it was stated that they decided that a softening might be needed after a point in the labor market to alleviate the upward pressures on wages and prices.
Regarding the economic outlook, FOMC members predicted that economic activity indicated modest growth in the second half of this year, but that the US economy will grow at a below-trend pace in the next few years and the labor market will tighten less due to the restrictive stance of monetary policy and continuing global winds.
It was pointed out that the participants will consider the pace and scope of policy rate increases in light of incoming macroeconomic data and will continue to act by monitoring the effects of this on economic activity and inflation outlook.
While the minutes note that FOMC Officials thought it would be appropriate at some point to slow the pace of policy rate hikes, many members stated that once the policy rate has reached a sufficiently restrictive level, it would be appropriate to maintain this level for some time until there is convincing evidence that inflation is on track to return to the 2% target.
In addition, the FOMC Members underlined that the policy decisions of the central banks of developed and developing countries may also have an impact on the US economy and that the risks posed by the more restrictive policy in this context may be bilateral. Finally, it was added that in the current global financial environment, FOMC Members spoke about the importance of adjusting the policy tightening pace to mitigate significant negative risks on the economic outlook.
As it will be remembered, at the 20-21 September meeting, the bank increased the interest rate by 75 basis points for the third time in a row, increasing the federal fund target to the range of 3.25-3.50%. In addition, it was announced that the balance sheet contraction would be accelerated as planned in September, and within this framework, mortgage-backed securities would be reduced by $35 billion per month and treasury securities by $60 billion per month.
One Step Behind: In the Economic Projections Report, based on the expectations of the FED Committee members at the meeting, the gross domestic product forecast (GDP) for 2022 was reduced from 1.7% to 0.2%, while the PCE inflation expectation was increased from 5.2% to 5.4%. In this period, the interest rate forecast increased from 3.4% to 4.4%.
Looking at the meeting minutes, it was underlined that inflation continued to rise due to supply-demand imbalances related to the coronavirus pandemic and the spread of food and energy prices to a broader base with the Russo-Ukraine war while it was reflected that the war and related events put additional pressure on them.
While it was written that many Committee members decided that they should adopt and maintain a more restrictive policy stance to achieve the target of reducing high inflation, it was stated that they increased their assessments of the interest rates required to reach the 2% inflation target.
In the minutes, in which it was emphasized that the cost of taking too few measures to reduce inflation most likely outweighs the cost of taking too many measures, they stated that the latest inflation data was above expectations in general, and accordingly, inflation fell more slowly than expected.
Stating that they expect inflationist pressures to continue in the near term, FOMC members reiterated their strong commitment to returning to 2% inflation targets, and many officials emphasized the importance of staying on this course for a while, even if the labor market slows down.
While it was noted that the participants thought that supply and demand imbalances in the labor market would gradually decrease and unemployment rates could increase a little more due to the tight stance, it was stated that they decided that a softening might be needed after a point in the labor market to alleviate the upward pressures on wages and prices.
Regarding the economic outlook, FOMC members predicted that economic activity indicated modest growth in the second half of this year, but that the US economy will grow at a below-trend pace in the next few years and the labor market will tighten less due to the restrictive stance of monetary policy and continuing global winds.
It was pointed out that the participants will consider the pace and scope of policy rate increases in light of incoming macroeconomic data and will continue to act by monitoring the effects of this on economic activity and inflation outlook.
While the minutes note that FOMC Officials thought it would be appropriate at some point to slow the pace of policy rate hikes, many members stated that once the policy rate has reached a sufficiently restrictive level, it would be appropriate to maintain this level for some time until there is convincing evidence that inflation is on track to return to the 2% target.
In addition, the FOMC Members underlined that the policy decisions of the central banks of developed and developing countries may also have an impact on the US economy and that the risks posed by the more restrictive policy in this context may be bilateral. Finally, it was added that in the current global financial environment, FOMC Members spoke about the importance of adjusting the policy tightening pace to mitigate significant negative risks on the economic outlook.
