Dom’s Quick Take: May FOMC Minutes Leave Door Open to Further Rate Hikes

The minutes showed the Fed has not settled for an extended pause. Here are the key quotes:

There has been only limited progress on disinflation:

‘Participants agreed that declines in core inflation had been slower than they had expected. Core goods inflation had decelerated less rapidly than expected, despite supply chain constraints continuing to ease. Additionally, core nonhousing services inflation had shown few signs of slowing in the past few months.’

Lower GDP and employment growth are needed:

‘Participants expected that a period of below-trend growth in real GDP and some softening in labor market conditions would be needed to reduce inflationary pressures over time.’

More tightening could be needed to bring about the needed economic slowdown:

‘In discussing the policy outlook, participants generally agreed that in light of the lagged effects of cumulative tightening in monetary policy and the potential effects on the economy of a further tightening in credit conditions, the extent to which additional increases in the target range may be appropriate after this meeting had become less certain.’

‘In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, various participants noted specific factors.

• The degree and timing with which cumulative policy tightening restrained economic activity and reduced inflation.
• the degree to which tighter credit conditions for households and businesses would weigh on activity and reduce inflation, which participants agreed was very uncertain.
• Additional factors included the progress toward returning inflation to the Committee’s longer-run goal of 2 percent, and the pace at which labor market conditions softened and economic growth slowed.’

‘Almost all participants stated that, with inflation still well above the Committee’s longer run goal and the labor market remaining tight, upside risks to the inflation outlook remained a key factor shaping the policy outlook.’

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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