By: Rhona O'Connell, Head of Market Analysis
FOMC Minutes of the June 2021 meeting
Less hawkish than the mid-June market reaction was anticipating. “Substantial further progress” is the name of the game.
Key elements:
History.
Q2 GDP expanding faster than had been expected.
Labour market conditions improved further, with PCE picking up smartly, but largely on transitory forces. Unemployment end-May 5.8% [but up at 5.9% in June]
Underlying forces (improving real disposable income, high household net worth, low interest rates) point to strong real PCE growth over the rest of the year. Housing demand robust but materials shortage and a lack of stock was restraining sales in Q2.
Credit quality of large non-financial organisations remained largely stable. Municipal bond market remained accommodative.
Outlook:
Staff continues to see inflation push as transitory as base effects fade, but core PCE still expected to exceed 2% over this year, dropping below 2% next year and then a little above 2% in 2023.
Supply chain uncertainty and labour shortages continue to hamper the task of assessing progress towards fulfilling the dual mandate. Uncertainty over economic outlook therefore elevated, but the risks to the economy generally seen as broadly balanced, while risks to inflation are tilted to the upside if these disruptions persist for longer than currently assumed. Some Hawks concerned that inflationary expectations [persistent inflation] might reach “appropriate levels” if elevated readings parts; other Doves argue that downside risks remain because temporary price pressures might unwind faster than currently anticipated and because the forces that held down inflation and inflation expectations during the previous economic expansion had not gone away or might reinforce the effect of the unwinding of temporary price pressures.
Agreement that the economic recovery is incomplete, and risks remain.
Participants judged that the current stance of monetary policy and policy guidance remained appropriate to promote maximum employment as well as to achieve inflation that averages 2% over time and longer-term inflation expectations that are well anchored at 2%.
While some expect the economic conditions for raising the fed finds target rate to develop sooner than had been thought in March, several argued that continued uncertainty extends to the path of the fed funds rate.
Asset purchase programme: - the Committee’s standard of “substantial further progress” was generally seen as not having yet been met, though participants expected progress to continue. Mixed views about when tapering will be appropriate with several arguing that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans for asset purchases. Participants generally judged that, as a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than anticipated progress toward the Committee’s goals or the emergence of risks that could impede the attainment of the Committee’s goals.
Some arguing for reduced mortgage-backed securities due to pressures in the housing market; others arguing that these tapering should adjust both elements (i.e. Mortgage and Treasuries) together in order to maintain balance.
Expecting further downward pressure in money market rates.
Accommodative policies to remain in place until fulfilment of the dual mandate.
Asset purchasing programme to remain at current levels until; “substantial further progress” had been made towards the dual mandate goals.
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