The minutes from the September 20-21, 2022 Federal Open Market Committee (FOMC) meeting showed that curtailing inflation remains of paramount importance to the Fed.
On the progression of the economy, the Committee members noted that “recent indicators had pointed to modest growth in spending and production. Job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
Committee members anticipated that “ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee’s objectives.” Furthermore, given persistent inflationary pressures, many committee members have raised their view of the path that is necessary to bring inflation back towards the Fed’s long-term 2 percent target. Nonetheless, participants believe that once a restrictive level is reached, it will be maintained until there is clear evidence that inflation has begun to subside.
Key Implications
The minutes confirmed that reining in inflation remains the principal objective of the Fed. The uncertainty surrounding the Russia-Ukraine conflict will continue to add to the upside risk. While labor market conditions remain tight, there has been a noticeable deceleration in recent economic data, which is in line with the Fed’s expectations. Nonetheless, the path to restoring price stability is uncertain as monetary policy works with a lag, which will further soften economic activity before inflation begins to wane.
With stubbornly high inflation and economic activity contracting in the first half of 2022, recession fears continue to capture headlines, with some surveys showing that the probability of a recession within the next 12-months is hovering around 50%. These fears continue to be reflected in the spread between the U.S. 10-year and 2-year treasury yields, which remains in negative territory. We expect the Fed will continue to raise rates to a peak of 4.5%, before pausing to monitor the impacts of its actions on economic activity and inflation.
