FOMC Statement: No Surprises…. Decision on Size of September Meeting Not Made

July 27, 2022

The size of the interest rate hike, 75 basis points, matched expectations and the previous increase in mid-June. More increase in the future “will be appropriate.” Quantitative tightening that reduces the size of the Fed balance sheet by via not fully reinvesting matured principal of maturing assets, will proceed on the scheduled outlined in May. In characterizing the economy, the statement notes that spending and production have softened but that labor measures such as the jobless rate and job gains reflect a tight market. A citation about Covid-19 lockdowns in China that was included in the previous statement has been deleted, as lockdown were relaxed. As before, “the Committee is highly attentive to inflation risks.” In other words regaining price stability is the paramount factor guiding policy for now. The decision was unanimous, with KC Fed President Esther George, who had preferred a 50-bp increase in June, now joining the majority camp. Also the FOMC is back to full strength, so the decision was 12-o, comprised of five voting district presidents and seven members of the Board of Governors. The gender composition was six men and six women.

Chairman Powell spoke of an inflection point in the tightening cycle. Now that the central bank interest rate is back to a range of neutrality, forward guidance will be less precise, and the size of rate hikes will be more data-driven than before and thus made on a meeting-to-meeting basis. The fundamental guiding question for FOMC officials going forward is what size rate change is most appropriate for restoring price stability. Questioners tried to pin Powell down to saying if policy would be modified in a recession. He didn’t answer that and should not have. What the Fed does in such circumstances depends on the inflationary context. The Volcker Fed waited a whole year after the economy entered a recession before acting, and after 15 years of getting it wrong, that’s what it needed to do. This inflation emerged much more quickly than that one and probably is less entrenched. But supply side factors may not go away, and that could affect the Fed’s reaction function. The September meeting is eight weeks away, which is a relatively long interval. Much could change. One interesting fact to emerge is that the Fed is looking more closely at CPI even though the PCE price deflator remains their favorite price indicator.

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



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