Fed minutes: leaders agree that activity has slowed, but inflation remains high

Federal Reserve (Fed) officials agreed during their December monetary policy meeting that US economic activity had slowed from the strong pace seen in the third half of the year. Authorities noted, however, that inflation and job growth remained high, despite softening over the year. They also noted that the unemployment rate remained low, according to the minutes of the meeting.

The document highlights that Fed members changed part of the statement to indicate their view that interest rates have probably reached their peak or are very close to it, at the same time leaving the door open for possible additional tightening, if they deem it necessary.

Fed members also agreed that tighter financial and credit conditions for households and businesses would likely weigh on economic activity, hiring and inflation, but that the extent of these effects was uncertain. They agreed that they would remain “extremely attentive to inflation risks”. They further said that the US banking system was solid and resilient.

The leaders reinforced that they would continue to monitor new data and would be prepared to adjust the policy as appropriate, “if risks arise that could impede the achievement of the goals”.

Staff saw upside risks for inflation and bearish risks for US activity

The Federal Reserve (Fed) technical team assessed the risks to inflation as bullish, when presenting its review of the economy during the December monetary policy meeting. According to the minutes of the meeting, the reason was that prices remained high and there was a possibility that inflation would prove to be more persistent than expected or that supply shocks would occur.

The risks to economic activity were considered bearish by the staff. The very possibility of additional monetary tightening was seen as a downward risk to activity projections.

Overall, the economic forecasts presented in December were very similar to those of the previous meeting, the minutes released today showed. The document indicated that the staff continued to expect a sharp slowdown in the increase in Gross Domestic Product (GDP) in the fourth quarter of 2023 compared to the third, but that the year's growth would remain solid.

“It is expected that the delayed effects of previous monetary policy actions, through their contribution to the continued restriction of financial and credit conditions, will be more fully revealed in the containment of economic activity in the coming years”, points out an excerpt from the minutes.

The staff revised its inflation forecast downwards, and assessed that inflation would be less persistent than previously projected. Technicians estimated that the consumer spending price index (PCE) would end the year just below 3% per year, with the core PCE just above 3%. “Inflation is expected to decline in the coming years as demand and supply in product and labor markets become better aligned; In 2026, headline and underlying PCE inflation is expected to approach 2%”, says the minutes.

Data reduced perception of need for restrictive policy, assesses staff

During the period between meetings, some softer-than-expected data releases appeared to lessen the perception among investors that policy may have to be even more restrictive, assesses the Federal Reserve's (Fed) technical team, according to the minutes of the meeting. last meeting of the authority, in December. The publication, released today, points out that the staff also noted that market participants considered that communications on monetary policy, in general, pointed to a policy that was slightly less restrictive than expected.

“As a result, nominal Treasury yields decreased significantly and the expected market-implied path for the Fed funds rate beyond the next few months shifted downwards,” he says. Financing conditions remained moderately restrictive, as borrowing costs remained high, despite having declined during the interim period, the team assesses.

Bank credit conditions appeared to become slightly more restrictive during the period between meetings, but credit to businesses and households remained generally accessible, the team points out. Credit has remained available to most consumers, although consumer credit flows have declined in recent months, it suggests.

Financial conditions became more relaxed in the period between meetings

Financial conditions in the United States reversed part of the tightening that occurred during the local summer and much of the fall, according to the minutes of the Federal Reserve's (Fed) monetary policy meeting. According to the document, the rise in stock prices in the country was supported by the decline in Treasury bond yields and the growth in profits. that exceeded consensus expectations. The implied volatility in shares has decreased notably, he also points out.

Treasury yields fell sharply during the intermeeting period – more so over longer time frames – after having risen notably during the previous period, as investors appeared to interpret incoming data as reducing the risks of prolonged inflationary pressures, says the minutes. Furthermore, market participants interpreted the Fed's communications as solidifying the view that the Fed funds rate could be at its maximum, the document says.

Respondents to the Fed survey largely converged on the opinion that the maximum interest rate level for this cycle had been reached. The trajectory pointed out by interviewees suggested that the first reduction in the rate would occur in June, unchanged from the October survey.