There were no surprises in the FOMC’s policy statement in June, and all the interesting information was either in the new set of economic projection summaries or in President Jerome Powell’s post-meeting press conference.
What has seemed to gain the most attention from the press and commentators is the allegedly more hawkish stance in policy, as evidenced by an increase in the median federal funds rate for 2023.
Now 2023 is a long way off, and a lot can happen in the economy and with inflation by then. But more interesting than the increase in the median federal funds rate, which stood at 0.6%, is the wide range of opinions on the appropriate policy in 2023, as evidenced by the dot chart. Interestingly, seven participants saw no rate hikes in 2023; two saw only one rate move; three saw only two movements; three saw three movements; three saw four movements; and two saw a total of six moves, assuming those moves were in 25 basis point increments.
The reason the median rate reached 0.6% for 2023 is that a minority of participants saw more than two rate hikes in 2023, pushing the median much higher than a majority (12) of respondents. committee participants would support. Of course, we don’t know what responses were from voting members of the FOMC (a list that changes every year); and the views of voting members are most critical in determining the results.
There is other interesting information buried in the SEP that raises questions about the projections and their consistency.
First, most of the changes in the projections are limited to 2021. GDP was raised from 6.5% to 7% and unemployment remained unchanged, but PCE inflation was increased from 2.4% to 3%. , 4% and core PCE inflation was increased from 2.2% to 3%. This change implies that participants have seen growth and acceleration in inflation but no significant progress on the employment front.
Second, while we have heard anecdotal evidence of increases in energy and food costs, the recent slight decline in food and gasoline prices suggests that most of the price increase has been considered by participants as being external to food and energy, since 0.8 percentage point of the 1 percentage point increase in PCE was not due to food and energy per se . Indeed, Powell suggested at the press conference that the 0.6 percentage point increase in PCE was due to car shortages and associated price increases.
Third, there has been a substantial decline in the GDP growth projection in 2022 compared to 2021, from 7% to 3.3%, which is still above estimates of potential; but there was no change in SEP between the March and June estimates. In June’s estimates, growth slows even more, to fall to around 2.4% in 2023. Unemployment declines in 2022, indicating further improvement in labor markets, but only slightly more to reach 3. 5% in 2023, still unchanged between March and June. Finally, inflation – both PCE and core PCE – decreases by more than a percentage point in 2022 and increases only slightly above the target in 2023.
Finally, the slowdown in growth and inflation lasts until 2023, with no change in the federal funds rate target in 2021 and 2022; yet the Committee has projected a series of rate hikes in 2023. It is difficult to see what could be going on in the Committee’s mind or in the data it faces to trigger rate hikes, other than a desire. to begin to restore the policy to a more normal position. The slowdown in growth and inflation seen in 2022 would be consistent with the view previously expressed that some of the price increases seen in 2021 were the result of supply-demand mismatches and supply chain disruptions. supply which will eventually be corrected.
Regarding the press conference, a dominant theme that arose was uncertainty – uncertainty about the trajectory of the virus, uncertainty about the pace of vaccinations, uncertainty about the path of economic recovery, uncertainty about employment. and uncertainty about inflation, to name a few. Powell was clear when discussing the recovery: the economy is still a long way from showing the substantial progress he and the FOMC are demanding in the jobs situation in order to justify a change in policy. In addition, when the situation improves, as reflected in the 2023 tariff assumptions, substantial adjustments would remain in place.
Asked about the gradual increases in the Fed’s portfolio, Powell declined to indicate any timeframe. He said the recent meeting was where the committee was just “talking about talking” about portfolio changes, and perhaps the phrase should be removed. He also indicated that the Fed will provide sufficient warning in advance of any portfolio change. Speculation was whether tapering would start before a rate change, whether the portfolio realignment would be completed before a rate change, or whether a combination of the two might be appropriate.
Because of how forcefully Powell touted the new policy framework and the guidance it provided to markets, it was surprising to hear him say, in response to a question, that the target for average inflation was not not a formula but subjective, and he admitted that the approach was more like “flexible inflation targeting”.
Thus, it seems, for the moment, that the policy tightening is still far away; and it is not at all clear that all the attention of the press and the markets is warranted at this point. We are in a period of watchful waiting with many uncertainties yet to be resolved.
Robert Eisenbeis is Vice President and Chief Monetary Economist at Cumberland Advisors in Sarasota. Previously, he was Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. In this capacity, he attended Federal Open Market Committee meetings for over 11 years. He is a member of the National Association for Business Economics, a member of the Wharton Financial Institutions Center, and a member of the Shadow Financial Regulatory Committee and the Financial Economists Roundtable. Eisenbeis values feedback from readers. Contact him at [email protected] or 941-926-6279.