Rigorous debate on where inflation is headed
The Federal Reserve today released minutes from its June 13-14 Federal Open Market Committee (FOMC) meeting, with several major items remaining in the murky category.
There was no agreement on when the Fed might begin trimming its balance sheet. The central bank wants to start winding down the $4.5 trillion bond portfolio without roiling longer-term interest rates, while gradually raising the policy rate. The minutes indicated that the committee wants to begin the balance-sheet process this year. The Federal Reserve has released a rough plan on this topic. The Fed said in June it would runoff maturing principal payments on Treasuries initially at $6 billion per month, increasing by $6 billion every three months over 12 months, until it reaches $30 billion. For agency and mortgage-backed securities debt, the cap starts at $4 billion, and rises by $4 billion every three months until it hits a $20 billion a month. Officials debated when they should launch those plans, with several arguing the Fed had sufficiently prepared markets to move soon, while others suggested waiting for more proof that inflation would pick up, according to the June minutes. Several Fed officials “preferred to announce a start to the process within a couple of months” in part because the Fed’s “communications had helped prepare the public for such a step,” the minutes said. Others urged more patience, with some suggesting “that a near-term change to reinvestment policy could be misinterpreted as signifying that the committee had shifted toward a less gradual approach to overall policy normalization.”
On inflation, the official Fed message still views the dip in inflation as transitory, but several panel members expressed concern that progress toward reaching the 2.0 percent inflation objective might have slowed and recent softness might persist.
The Fed’s preferred inflation gauge, the price index for personal-consumption expenditures, briefly surpassed the Fed’s annual 2% target in February but posted greater-than-expected drops since then, rising just 1.4% on the year ended May. “Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors,” the minutes said. “However, several participants expressed concern that progress toward the committee’s 2% longer-run inflation objective might have slowed and that the recent softness in inflation might persist.”
Regarding equity valuations, a line in the report says equity prices were high when judged against standard evaluation. Fed Chairwoman Janet Yellen said last month that asset valuations look “somewhat rich” using traditional metrics like price-earnings ratios. Yellen begins her semi-annual testimony to Congress on July 12 before the House Financial Services Committee.
The next Fed policy meeting is July 25-26.
As for interest rates, U.S. central bankers in June raised the benchmark lending rate for a second time this year to a range of 1% to 1.25%, while describing monetary policy as “accommodative” in their statement. They reiterated their support for continued gradual rate increases, according to the minutes. The minutes said “several participants endorsed a policy approach” where the labor market would undershoot their estimate of full employment “for a sustained period.” Meanwhile, several other participants “expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation.” Before Wednesday’s release of the account of June’s meeting, traders in futures markets placed a 19% probability on a Fed rate increase by September, and nearly a 60% probability of at least one rate increase by year-end, according to CME Group.
Financial conditions were also debated at the meeting, with some participants arguing that “increased risk tolerance” among investors could be lifting asset prices. A few others expressed concern that “subdued market volatility” could lead to financial stability risks.
Officials will receive two more monthly inflation readings before their September meeting and are likely to study those reports closely to confirm their latest forecasts.
