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Federal Reserve Chairman Jerome Powell in June 2022.
Kevin Dietsch / Getty Images
The minutes of the Federal Reserve meeting June 14-15 reveal central banks’ growing anxiety over inflation and plans to take a restrictive political stance to cool rapidly rising prices.
The minutes are read in a hawkish manner. The major stock indices, however, rose after the launch, as investors consider economic developments since the last Fed meeting and bet that reduced economic growth will limit the amount of hardening it has to bear. out the central bank. Both the S&P 500 and the Nasdaq 100 gained about 1% in one hour after launch.
Members of the Federal Open Market Committee, the Fed’s arm that defines policies, agreed in June that a rate increase of 0.5 percentage points or 0.75 percentage points would likely be appropriate in July after agreeing an increase of 0.75 percentage points in June. This was the largest increase in rates since 1994, sparked by a hot consumer price index and a surprise jump in consumer inflation expectations just before the June meeting. These two data points shattered hopes that inflation had already peaked and sounded the alarm that inflation was consolidating.
Investors already knew the Fed is between half a point and another three-quarter increase for July. Fed Chairman Powell suggested the base case is the first, though he hasn’t pulled another 0.75-point increase off the table. Traders are priced around a 90% chance of raising 0.75 points in July, and the minutes should do nothing to change that expectation.
Where the question remains is what happens after July. On the face of it, the latest minutes of the meeting indicate that the Fed will remain aggressive, with increases of 0.5 percentage points the new movements of 0.25 points and officials suggest that they will be wrong on the side of excessive hardening.
“Participants agreed that the economic outlook justified moving to a restrictive policy position and recognized the possibility that an even more restrictive position could be appropriate if high inflationary pressures persist,” the minutes say.
But one of the main reasons for the 0.75 percentage point increase was a data point that has since been revised downwards, supposedly relieving the panic that is palpable in minutes. This is when commodity prices fall, further raising hopes that inflation, at least in terms of goods in the economy, has surpassed.
As for the revised data point that was key to the large-scale increase: officials expressed special concern about the University of Michigan’s 5-10 year inflation expectation indicator in the monthly consumer confidence report from the university. This measure went from 3% to 3.3% just before the June meeting. “Many participants raised concerns that long-term inflation expectations could begin to drift to levels incompatible with the 2% target,” the minutes say, adding that these participants said that if inflation expectations inflation would not be substantiated, it would be more important. costly return inflation to the target.
However, shortly after the June meeting and the 0.75-point decision, the University of Michigan released its revised report, with the 5 to 10-year inflation expectation figure revised downward to 3 p.m. , 1%. He noted that the revised reading was again within the range of 2.9% to 3.1% that has been maintained over the past year.
Still, 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, fuel the hope that inflation has finally been surpassed, the peak is one thing and the fall is another. Consider what Goldman Sachs economists said this week. The underlying year-on-year 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 still be at 5.5%, they add, which is almost three times the projected annual inflation rate.
Markets have already shifted their focus from inflation to growth, and more so after the sharp rise in June and before a potentially similar rise this month. It is unclear when the Fed will change its approach and whether inflation will remain high even as growth falters. The June minutes give no indication that officials are beginning to hesitate. But things are going fast, and the minutes are already three weeks old.
“What the markets want to hear now is what the Fed has in mind if economic data releases continue to indicate a deeper and more severe drop without a proportional reduction in inflation,” says Quincy Krosby, chief equity strategist of LPL Financial. What the markets expect is that at the next meeting, inflation will subside, indicating that Fed policy is working, he says.
Therefore, investors will have to keep waiting. At this point, economists expect the June CPI report, to be released on July 13, to show that general prices rose 8.6% more than the previous year.
Write to Lisa Beilfuss at lisa.beilfuss@barrons.com