FOMC Minutes Preview: Stale Discussion Into Fed's "Fragile" Pause Consensus

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by Tyler Durden
Wednesday, May 24, 2023 - 04:45 PM

Ahead of today's FOMC Minutes release, the most important thing to note is that the text will likely reveal that during the Fed's May 2-3 meeting, concern over credit conditions convinced most Fed officials to signal an impending rate pause. Even so, some might have been more reluctant than others, worried that inflation is coming down too slowly. The diverse reads on the economy suggest the consensus for a wait-and-see approach could be fragile.

The second most important thing is that one can safely ignore the minutes since they are already quite stale, given the more recent Fedspeak we have heard. As Newsquawk reminds us, at the May meeting, the FOMC raised rates by 25bps to 5.00-5.25%, in line with expectations, while also hinting at a 'pause' (more on that in a moment) by dropping the language about anticipating more policy firming.

The Fed will determine further policy firming based on tightening to date, policy lags, and other developments, Fed Chair Powell said, adding that the central bank remains committed to bringing inflation back down to target, and will take a data-dependent approach to determine further rate hikes, while there will be an ongoing assessment of whether the Fed has reached a sufficiently restrictive level.

The Senior Loan Officer Opinion Survey was consistent with banks tightening lending standards and the pace of lending slowing, while the Committee has a view that inflation is not going to come down so quickly. Powell also said that they are much closer to the end than the beginning, and feels like they are close or maybe even there.

However, since the May meeting, officials have been emphasizing that their latest policy actions should not be read as a 'pause', and the Committee is prepared to act further to tame inflation pressures. Post-FOMC, Fedspeak has become more nuanced in terms of the differences in view over the policy outlook, and some divergences are emerging. In the outright hawkish camp,

  • In the hawkish camp, Logan (current voter) argued that the data does not yet show that skipping a rate hike in June is appropriate, and Governor Bowman (also 2023 voter) said additional rate hikes were likely appropriate.

  • In the neutral-but-with-hawkish elements camp, Bullard (non-voter) said he will keep an open mind going into the June meeting, but was inclined to support another rate hike.

  • Kashkari (voter) said the Fed has more work to do.

  • Bostic (2024) said there was still a ways to go to beat inflation.

  • Vice Chair nominee Jefferson has spoken about how inflation remains too high, and a year is not enough time to assess the full impact of hikes thus far. In the circumspect camp,

  • Williams (perma voter) has advocated a wait-and-see approach on rates.

  • Goolsbee (voter) said it is too soon to be talking about the Committee's next decision, but he was cautious about the May 25bp hike.

Analysts will be looking to see the extent to which the minutes reflect these divergent views. Here are some other things markets expect today, courtesy of Bloomberg, which is focusing on the "fragile rate-pause" consensus.

  • “Many” participants likely supported the decision to signal an impending pause because of concerns over tightening credit conditions, and even though “some” may be disappointed at the slow progress of disinflation, uncertainty about the outlook likely convinced them to agree to a wait-and-see approach.

  • That likely contributed to the decision to tweak the clause in the previous policy statement that “the committee anticipates that some additional policy firming may be appropriate.” Instead, in the May statement the committee said it will take into account cumulative tightening to date, among other factors, in determining the extent to which additional policy firming may be appropriate.

  • At the post-meeting press conference, Fed Chair Jerome Powell appeared to downplay the role of wage growth in driving inflation. The minutes may reveal why – perhaps more officials now believe wage growth is a lagging inflation indicator. If so, the Fed may be more amenable to cutting rates in a downturn, and markets may not be wrong to price in some rate cuts this year.

  • Powell said at the press conference that wage growth and inflation are both high, but no wage-price spiral has taken root. It is likely that “many” FOMC participants share that view.

  • Fed staff will likely forecast a recession this year, even though Powell disagrees. The staff likely interpret the data as showing a secular downdraft to business investment, while household spending remains resilient.

  • Since the May meeting, some hawkish participants – Jim Bullard, Michelle Bowman, Loretta Mester, and Lorie Logan — have voiced support for more hikes.

  • As the committee continues deliberating on the future rates path, Governor Lisa Cook and Chicago Fed President Austan Goolsbee are most likely to break from the hawkish consensus.

Looking ahead, Bloomberg economists expects the Fed to hold rates steady when it next meets June 14–15, as their baseline is that a last-minute deal on the debt ceiling will raise financial volatility ahead of the meeting and weigh on the economic outlook. Odds favor a prolonged pause thereafter. If the debt-ceiling impasse is resolved uneventfully — with a comfortable margin before the X-date and only small spending cuts — a 25-basis-point hike will be on the table in June.