Before reading the minutes, we have to fully understand all the balls the Fed is now juggling. Keep hiking to temper inflation but don’t put US economy in deep recession. Slow down the pace of rate hikes from here without resulting in a party in the markets which would thus ease financial conditions. Keep rates higher for longer to temper wage and job gains but somehow create a soft landing. Continue shrinking the balance sheet without tanking the markets. Now reading the minutes we can see how the Fed is trying to wordsmith their way through this.
On why rates will stay higher for longer: “Participants noted that, in the latest inflation data, the pace of increase for prices of core services ex shelter was high. They also remarked that this component of inflation has tended to be closely linked to nominal wage growth and therefore would likely remain persistently elevated if the labor market remained very tight…they assessed that bringing down this component of inflation to mandate consistent levels would require some softening in the growth of labor demand to bring the labor market back into better balance.” So yes, the Fed is purposely trying to have people lose their jobs and see a slowing of wage gains from here but we knew that already.
Participants saw risks of persistent inflation but “a number of participants judged that the risks to the outlook for economic activity were weighted to the downside.”
In order to cater to the more dovish and also to the reality of all the tightening already in place, “In determining the pace of future increases in the target range, participants judged that it would be appropriate to take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” This though was basically said three weeks ago.
The Fed’s biggest fear so as to not repeat the 1970’s, “several participants commented that historical experience cautioned against prematurely loosening monetary policy.” And their other fear is the markets resuming its party when the Fed finishes, or comes close, its rate hikes. “Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.”
Bottom line, “Participants generally observed that maintaining a restrictive policy stance for a sustained period until inflation is clearly on a path toward 2% is appropriate from a risk management perspective.” I’ll add, so while inflation might head back to 2% or less on the downswing from the peaks, it won’t stay there and 3-4% will be where it settles out and that means a higher for longer level of interest rates. This is a new investing and economic environment that we need to embrace and while 2022 reflected this, it won’t reverse for a while back to the pre-Covid Kansas monetary fantasyland.