Summary Takeaways
The Fed’s staff of economists found it noticeable that the probability of avoiding recession through 2024 had grown over the intermeeting period.
The Fed’s staff of economists “characterized the financial vulnerabilities of the US financial system as notable. The staff judged that asset valuation pressures remained notable.”
“Some participants” of the FOMC noted that the impact of policy tightening on housing “may have peaked.”
Key factors the FOMC is watching to assess the disinflationary process: “…softening in core goods prices, lower online prices, evidence that firms were raising prices by smaller amounts than previously, slower increases in shelter prices, and recent declines in survey estimates of shorter-term inflation expectations.”
“…several participants commented that significant disinflationary pressures had yet to become apparent in the prices of core services excluding housing.”
“Participants cited upside risks to inflation, including those associated with scenarios in which recent supply chain improvements and favorable commodity price trends did not continue or in which aggregate demand failed to slow by an amount sufficient to restore price stability over time.”
“Participants” means the entire FOMC. Very key.
The money section:
“Participants discussed several risk-management considerations that could bear on future policy decisions. With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy. Some participants commented that even though economic activity had been resilient and the labor market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate; these included the possibility that the macroeconomic effects of the tightening in financial conditions since the beginning of last year could prove more substantial than anticipated. A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee’s goals had become more two sided, and it was important that the Committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening.
Supporting Quotes
“Respondents to the Open Market Desk’s Survey of Primary Dealers and Survey of Market Participants in July continued to place significant probability of a recession occurring by the end of 2024. However, the timing of a recession expected by survey respondents was again pushed later, and the probability of avoiding a recession through 2024 grew noticeably.”
“The staff provided an update on its assessment of the stability of the financial system and, on balance, characterized the financial vulnerabilities of the U.S. financial system as notable. The staff judged that asset valuation pressures remained notable. In particular, measures of valuations in both residential and commercial property markets remained high relative to fundamentals. House prices, while having cooled earlier this year, started to rise again, and price-to-rent ratios remained at elevated levels and near those seen in the mid-2000s. Although commercial property prices moved down, developments in the CRE sector following the pandemic may have produced a permanent shift away from traditional working patterns. If so, fundamentals in the sector could decline notably and contribute to a deterioration in credit quality.”
“Some participants observed that recent increases in home prices suggested that the housing sector’s response to monetary policy restraint may have peaked.”
“Participants cited a number of tentative signs that inflation pressures could be abating. These signs included some softening in core goods prices, lower online prices, evidence that firms were raising prices by smaller amounts than previously, slower increases in shelter prices, and recent declines in survey estimates of shorter-term inflation expectations and of inflation uncertainty.”
“Various participants discussed the continued stability of longer-term inflation expectations at levels consistent with 2 percent inflation over time and the role that the Committee’s policy tightening had played in delivering this outcome. Nonetheless, several participants commented that significant disinflationary pressures had yet to become apparent in the prices of core services excluding housing.”
“Participants generally noted a high degree of uncertainty regarding the cumulative effects on the economy of past monetary policy tightening. Participants cited upside risks to inflation, including those associated with scenarios in which recent supply chain improvements and favorable commodity price trends did not continue or in which aggregate demand failed to slow by an amount sufficient to restore price stability over time, possibly leading to more persistent elevated inflation or an unanchoring of inflation expectations.”
“Amid these economic conditions, almost all participants judged it appropriate to raise the target range for the federal funds rate to 5¼ to 5½ percent at this meeting.”
“A number of participants noted that balance sheet runoff need not end when the Committee eventually begins to reduce the target range for the federal funds rate.”