Key Points in the FOMC June Minutes
Inquiring minds are digging into the Minutes of the June Federal Open Market Committee Minutes for clues on inflation (emphasis mine).
- In their discussions on inflation, participants stated that they had expected inflation to move above 2 percent in the near term, in part as the drop in prices from early in the pandemic fell out of the calculation and past increases in oil prices passed through to consumer energy prices.
- However, participants remarked that the actual rise in inflation was larger than anticipated, with the 12-month change in the PCE price index reaching 3.6 percent in April.
- Participants attributed the upside surprise to more widespread supply constraints in product and labor markets than they had anticipated and to a larger-than-expected surge in consumer demand as the economy reopened.
- Most participants observed that the largest contributors to the rise in measured inflation were sectors affected by supply bottlenecks or sectors where price levels were rebounding from levels depressed by the pandemic.
- Looking ahead, participants generally expected inflation to ease as the effect of these transitory factors dissipated, but several participants remarked that they anticipated that supply chain limitations and input shortages would put upward pressure on prices into next year.
- Several participants noted that, during the early months of the reopening, uncertainty remained too high to accurately assess how long inflation pressures will be sustained.
- Participants noted that overall financial conditions remained highly accommodative, in part reflecting the stance of monetary policy, which continued to deliver appropriate support to the economy. Several participants highlighted, however, that low interest rates were contributing to elevated house prices and that valuation pressures in housing markets might pose financial stability risks.
- Although inflation had risen more than anticipated, the increase was seen as largely reflecting temporary factors, and participants expected inflation to decline toward the Committee’s 2 percent longer-run objective.
- Various participants offered their views on the Committee’s agency MBS purchases. Several participants saw benefits to reducing the pace of these purchases more quickly or earlier than Treasury purchases in light of valuation pressures in housing markets. Several other participants, however, commented that reducing the pace of Treasury and MBS purchases commensurately was preferable because this approach would be well aligned with the Committee’s previous communications or because purchases of Treasury securities and MBS both provide accommodation through their influence on broader financial conditions.
Surprise, Surprise, Surprise
Not only was there surprise, the report shows confusion and uncertainty.
Arguably, that’s a good thing, because if the Fed was ever certain of anything significant, I am certain they would be wrong.
Fed Minutes suggest a debate whether to taper MBS first. A reminder may be due that MBS should have never, ever be purchased by the Fed – it was the first step on a slippery slope into fiscal turf. Fix it by stop buying MBS, then swapping them for Treasuries.
— Axel Merk (@AxelMerk) July 7, 2021
Unfortunately, those who were most wrong about things are the ones calling the shots.
Addendum
In response to my comment above Axel Merck replied.
I’m currently reading “The High Cost of Good Intentions: A History of U.S. Federal Entitlement Programs” – excellent, yet depressing read – depressing because it shows the destructive dynamics that favor “those who were most wrong about things are the ones calling the shots”
— Axel Merk (@AxelMerk) July 7, 2021
Mish
