The Federal Open Market Committee (FOMC) minutes from the latest meeting showed that officials were concerned about the recent surge in stock prices and warned against an "unwarranted" easing of financial conditions. Some officials also expressed the need to balance two-sided risks, which suggests a growing split within the Fed about the outlook for monetary policy. In addition to these concerns, the FOMC reaffirmed its strong commitment to returning inflation to the target of 2%.
There was also recognition within the FOMC of the disconnect between market expectations and the Committee's outlook for interest rates. Despite this, FOMC members noted that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee's resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path.
While FOMC members noted that there were few signs of adverse wage-price dynamics at present, they also acknowledged that bringing down inflation to mandate-consistent levels may require some softening in the growth of labor demand in order to bring the labor market back into better balance. In light of the heightened uncertainty surrounding the outlooks for both inflation and real economic activity, most members emphasized the need to retain flexibility and optionality when moving policy to a more restrictive stance.
The FOMC also provided updated inflation forecasts, with core goods inflation expected to slow further, housing services inflation anticipated to peak in 2023 before declining, and core non-housing services inflation forecast to decrease as wage growth eases. However, the FOMC noted that the risks to the inflation projection are skewed to the upside, while the risks to the outlook for real economic activity are tilted towards the downside due to factors such as sluggish private domestic spending, a subdued global economic outlook, and tight financial conditions. The possibility of a recession within the next year was also viewed as a plausible alternative to the baseline projection.
The FOMC also discussed financial stability issues related to balance sheet reduction, and indicated that it would continue to closely monitor money market conditions. Additionally, FOMC members began to address the anticipated increase in minority unemployment and the potential impact on the broader economy. Overall, the FOMC minutes provide insight into the Committee's current thinking on a range of issues and will be closely monitored by market participants as they consider the outlook for monetary policy.