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By: Rhona O'Connell, Head of Market Analysis
FOMC Minutes, March vs May
Conclusion: - the doves appear to be gaining some traction with downbeat reports from the Staff, although the hawks are still in the majority, with persistent concerns over inflation and wage gains.
Staff Economic review
May:
Economic data were limited but surveys - such as the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) in April, the National Federation of Independent Businesses survey in March, and the Federal Reserve Bank of New York’s Survey of Consumer Expectations in March—indicated that bank credit conditions were tightening further.
There is also the possibility that “cumulative tightening of monetary policy could affect economic activity more than expected” and that banking sector stresses could be more substantial than originally thought.
Wage growth
In March, growth had slowed but remained elevated; in May, wage rises continued to ease from last year’s peaks but rates were still elevated at 4.2% cf 5.9% in March 2022. Inflation “continued to slow” in May – but one element that will support the hawks’ view is that in May “near-term measures of inflation expectations from these surveys moved up but were still below their peaks seen last year”.
Credit conditions still a potential threat to industrial activity
The March comment “Expectations for future credit quality continued to deteriorate in some markets” was absent in May. But what it does say is that “interest rates on short-term small business loans continued to rise through March and reached their highest levels since the Global Financial Crisis”. Credit flows for business and households slowed moderately, reflecting high borrowing costs and market volatility amid banking sector stress “appeared to weigh on financing volumes in some markets”.
Participants’ views: it sounds as if GDP views were mixed; dovish tones were appearing, notably with respect to small businesses, which are the backbone of the economy.
Job gains had been robust in recent months [compare “job gains had picked up in recent months and were running at a robust pace” in March] although in May participants noted that real GDP growth was modest [declining inventory investment] and the outlook for real GDP was for it to grow at a rate below its longer-run trend rate this year – whereas in March the term was “well below”. The feeling was that the Fed and other government agencies had been effective in largely reducing banking stress, but also that small businesses rely on small and mid-sized banks and may disproportionately bear the brunt of tighter lending conditions. There was mention of a softer economic outlook, exacerbated by tighter lending standards.
The labour market was described as “very tight”, but easing, in terms of the reduced imbalance between supply and demand, along with less difficulty in hiring, lower turnover rates and some layoff among reporting Districts. [this implies the Beige Book – which is an important guide for FOMC members].
Policy Outlook:
Uncertainty overall about how much more tightening is appropriate.
Hawks: - “Some participants commented that, based on their expectations that progress in returning inflation to 2 percent could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings”.
Doves: - “Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary”.
Communication:
“Participants emphasized the importance of communicating to the public the data-dependent approach of policymakers, and the vast majority of participants commented that the adjusted language in the post-meeting statement was helpful in that respect. Some participants stressed that it was crucial to communicate that the language in the post-meeting statement should not be interpreted as signalling either that decreases in the target range are likely this year or that further increases in the target range had been ruled out.
Reminder; the key differences in the Statement between March and May were as follows: -
March: “Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated.
March: - The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4¾ to 5 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.
This was not there in May.
March: - In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
In May, this read as “In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”
So – a moderately softer stance, but the incoming data will be key as to what is decided in June at the next meeting 13-14th). The bond markets’ views are as follows – and have steepened in comparison with only a day or so ago and are currently discounting a 40% chance of a further 25-point hike in June. Typically the bond markets have been more benign than FOMC rhetoric; time will tell.
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Source: Bloomberg
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