FOMC Minutes

May 25, 2022

FOMC minutes from the meeting of May 3-4 confirmed that most members favored raising interest rates by an increment of 50 basis points rather than 25 bps in the next several meetings. No surprise there, as that’s essentially what Chairman Powell conveyed right after the meeting ended. The minutes also reveal a readiness if deemed necessary to restore price stability to raise the federal funds target eventually above its neutral where GDP growth neither stimulates nor depresses economic growth. While Powell hadn’t explicitly underscored that possibility, it’s hardly a startling one. With inflation as elevated as it has become and price risks still tilted toward the upside, it would be a big surprise if sustainable 2% inflation could be restored without lifting interest rates ultimately to levels that apply a clear brake on economic growth.

Only four members of the Federal Reserve Board of Governors attended the May 3-4 meeting. At full strength, the Board would have seven slots, and the Federal Open Market Committee comprises board members plus the presidents of the 12 FRS districts, five of whom on a rotating basis get to vote with the Board on FOMC decisions. A rotation of voting district presidents occurs  at the first FOMC meeting each calendar, putting four new people into the voting pool. The president of the NY Fed district has a permanent vote and doesn’t rotate in and out as do the other district presidents. But the point to be noted here concerns the understaffed governors, and it is related to the more general problem of congressional paralysis on all sorts of fronts. Like supreme court, federal judges and ambassadorships, candidates nominated for the Federal Reserve Board of Governors have to be confirmed by the senate, and the confirmation process is considerably backlogged.

The other comment to make here is that while the FOMC minutes address the preferred size of future changes, they say nothing about increase perhaps being decided at emergency meetings on on the calendar of eight scheduled meetings per year. There is no legality prohibiting inter-meeting rate changes, and there was a time when such were quite common. In a cycle of Federal Reserve rate hikes during 1988-89, for example, only three of ten rate changes were actually decided at scheduled meetings, and the other seven increases in that cycle totaled about twice as much as the hikes undertaken immediately after scheduled meetings. That custom was largely phased out by the following cycle of interest rate tightening during 1994-95 when the federal funds rate target was doubled to 6.0%. Only 25 basis points of that 300-basis point overall rate change was not implemented right after a scheduled FOMC meeting.

The taboo against raising rates at unscheduled meetings has not extended to policy cycles when the Fed has been easing its stance, however. There have been at least 23 inter-meeting cuts since 1987, including nine instances since 2001 that involved reductions of 50 basis points or more. Fed officials in the early days of the Covid-19 pandemic didn’t wait for a scheduled meeting to act. Two reductions at unscheduled meetings separated by 12 days and totaling 150 basis pints were made in March 2020. For another example, the central bank cut its interest rate after the 9-11 attacks by 50 basis points on September 17, 2001 and by that amount again 15 days later, rather than wait until their next scheduled policy review. Both of these situations involved emergencies. Isn’t the highest inflation rate in four decades an emergency, too? In these times when so much can transpire so quickly, policymakers need the flexibility to react just as quickly, and there’s not clear reason to distinguish times when the monetary stance needs to be tightened from times when easing the stances shouldn’t wait.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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