Newly Released FOMC Minutes Cause Concern

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New Year, Same Old Fed – A Synopsis of the Last FOMC Meeting

Interest rate moves orchestrated by the Federal Reserve or, more specifically, monetary policy as formed at each Federal Open Market Committee (FOMC) meeting have recently taken a front seat in driving markets. This includes the stock market, real estate prices, and more directly, bond values. In what direction is the FOMC likely to push rates in 2023, and at what pace? Some hints have been uncovered in the just-released December meeting minutes. The minutes describe the views expressed by policymakers and explain the reasons for the Committee’s decisions. While voting member thinking can change from one meeting to the next, it is seldom dramatic. This new set of minutes offered only subtle clues as to whether change is in store.

Fed Minutes Present a Case for Continued Rate Hikes

The minutes from the December 2022 Federal Open Market Committee (FOMC) meeting showed that the Fed remains committed to bringing inflation back to its defined 2% target. But the pace of rate hikes should taper in 2023. There was no discussion at all as to whether rates may be cut during 2023.

On the progression of the economy, the Committee members noted that GDP was increasing at a modest pace in the fourth quarter after expanding strongly in the third quarter. Labor markets had eased but remained tight enough to be trouble from an inflation point of view. Both Consumer Price Inflation (CPI) and Personal Consumption Expenditures (PCE) readings moved lower, but continued well above the target inflation range.

Jobs increased at a slower pace in October and November. Both the labor force participation rate and the employment-to-population ratio declined a little over the period of time between meetings. The private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, moved back down in October but remained higher than would seem consistent with dramatically lower inflation. 

Wage growth continued higher than a pace expected to be consistent with the the two percent monetary policy target.  Average hourly earnings rose 5.1% over the 12 months ending in November. Compensation per hour (CPH) in the business sector rose 4.0 percent over the four quarters ending in the third quarter, but the reported increase likely understated the true pace of increase in CPH, as the lower second-quarter employment data from the Quarterly Census of Employment and Wages had not yet been incorporated in the CPH measure.

Foreign economic activity grew in the third quarter, but some recent data point to weakening growth, weighed down by the economic fallout of Russia’s war with Ukraine and a COVID-19-related slowdown in China. High inflation continued to contribute to a decline in real disposable incomes, which, together with disruptions to energy supplies, depressed economic activity, especially overseas. In China, authorities began to ease social restrictions even as COVID cases surged, raising the prospect of significant disruptions to economic activity in the near term but also a faster reopening. Weaker global demand and high interest rates also weighed on activity in emerging market economies. Despite tentative signs of easing in foreign headline inflation, core inflationary pressures remained elevated in many countries. In response to high inflation, many central banks further tightened monetary policy.


The December 2022 minutes confirmed that reining in inflation remains the principal concern of the Fed. No members spoke of a scenario where they may lower rates this year, there is concern that the cost of money is getting easier despite the Fed’s tightening efforts. The expected path of the federal funds rate implied by financial market quotes ended, showing the market anticipates lower rates. This is likely reflective of the larger-than-expected moderation in inflation. Medium-to-longer-term nominal Treasury yields declined substantially over the intermeeting period. This was driven primarily by lower-than-expected inflation data releases, which appeared to prompt a substantial reduction in investors’ concerns about the possibility that inflation would remain high for a long period.

What Do the Minutes Say About Stocks?

Broad stock price indexes increased. This likely reflected reduced concerns about the inflation outlook and the associated implications for the future path of policy. On balance, the one-month option-implied volatility on the S&P 500 (VIX) decreased and was around the middle of its range since mid-2020. This makes sense because of reduced investor concerns about the inflation outlook, spreads of interest rates on corporate debt, mortgage-backed securities, and municipal bonds to comparable-duration Treasury yields, which all narrowed since the last meeting.

Inflation Worries Deflated

With inflation still well above the Committee’s longer-run goal of two percent, participants agreed that inflation was unacceptably high. Participants agreed that the inflation data received for October and November showed welcome reductions in the monthly pace of price increases, but they stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path.

Participants noted that core goods prices declined in the October and November CPI data, consistent with easing supply bottlenecks. Some participants also noted that, by some measures, firms’ markups were still elevated and that a continued subdued expansion in aggregate demand would likely be needed to reduce the remaining upward pressure on inflation. Regarding housing services inflation, many participants observed that measures of rent based on new leases indicated a deceleration, which would be reflected in the measures of shelter inflation with some lag. Participants noted that, in the latest inflation data, the pace of increase for prices of core services excluding shelter—which represents the largest component of core PCE price inflation—was high. They also remarked that this component of inflation has tended to be closely linked to nominal wage growth and, therefore would likely remain persistently elevated if the labor market remained very tight. Consequently, while there were few signs of adverse wage-price dynamics at present, they assessed that bringing down this component of inflation to mandate-consistent levels would require some softening in the growth of labor demand to bring the labor market back into better balance.

Rates Moving Forward

In discussing the policy outlook, participants continued to anticipate that ongoing increases in the target range for the federal funds rate is appropriate to achieve the Committee’s objectives. In determining the pace of future increases in the target range, participants judged that it would be appropriate to 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.

With inflation staying above the Committee’s two percent goal and the labor market remaining very tight, all participants had raised their assessment of the appropriate path of the federal funds rate relative to their assessment at the time of the September meeting. No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to two percent. Which would likely take some time.

In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy.

In light of the heightened uncertainty regarding the outlooks for both inflation and real economic activity, most participants emphasized the need to retain flexibility and optionality when moving policy to a more restrictive stance. Participants generally noted that the Committee’s future decisions regarding policy would continue to be informed by the incoming data and their implications for the outlook for economic activity and inflation and that the Committee would continue to make decisions meeting by meeting.

Take Away

It’s a new year, it’s the same Fed, inflation is still quite elevated, policymakers are surprised at how quickly some inflation measures did drop, but the drop wasn’t enough for them to reverse course.

The FOMC reserves the right to be data-dependent and change its pace or direction when the data changes. Until then, they still have more rate hikes they expect to unleash early this year.

Scheduled FOMC Meetings in 2023

January/February 31-1

March 21-22

May 2-3

June 13-14

July 25-26

September 19-20

October/November 31-1

December 12-13

The Policy announcements have been at PM on the second meeting date after they have adjourned.

Paul Hoffman

Managing Editor, Channelchek



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