FOMC Minutes: Commitment to avoid inflation entrenchment – UOB

Senior Economist at UOB Group Alvin Liew reviews the latest release of the FOMC Minutes of the June 14-15 gathering.

Key Takeaways

“The key takeaway from the 14/15 Jun FOMC minutes was that Fed policymakers agreed interest rates may need to keep rising for longer and into a restrictive policy stance to prevent higher inflation from becoming entrenched, even if it came at the cost of slower US economic growth “for a time”. Policymakers also warned of "a significant risk" if the Fed cannot maintain its credibility to fight inflation.”

“The other key takeaway was there was broad agreement among the policy makers as ‘participants judged that an increase of 50 or 75 basis points would likely be appropriate at the next meeting [Jul]’.”

“As evident from the minutes, the overarching message from the Fed was still centered on inflation with 90 references to inflation and that ‘many participants’ were concerned that ‘longer-run inflation expectations could be beginning to drift up to levels inconsistent with the 2 percent objective.’ There was not a single mention of ‘recession’ in the minutes, only the acknowledgement of slower growth. The policymakers also broadly agreed with the assessment of a ‘very tight [US] labor market’.”

“FOMC Outlook – Jun CPI inflation the key determinant for Jul FOMC policy action: FOMC Chair Powell highlighted the importance of headline CPI inflation to inflation expectations (and by that extension, to Fed policy). We will mark the Jun CPI (due on 13 Jul 2022, 8:30pm SGT) as the key determinant of whether we get a 50bps or 75bps hike for the next FOMC on 26/27 Jul. Currently, we are projecting US CPI inflation coming in at 0.8% m/m, 8.4% y/y in Jun (from 1% m/m, 8.6% y/y in May). Thus, inflation is still elevated and accelerating sequentially but the headline print will be off its peak (i.e. lower at 8.4% versus 8.6%), so that will warrant a 50bps hike for July, in our view. However, if inflation accelerates more than our expectation and prints above May’s 8.6% inflation rate, then that will mean a stronger response from the Fed is required, i.e. 75bps.”

“In addition to the move in Jul, we expect another two more 50bps rate hikes in Sep and Nov FOMC before ending the year with a 25bps hike in Dec. Including the 150bps of hikes to date, this implies a cumulative 325bps of increases in 2022, bringing the FFTR higher to the range of 3.25-3.50% by end of 2022, a range largely viewed as above the neutral stance (which is seen as 2.25-2.50%, the Fed’s long run projection of FFTR). We maintain our forecast for two more 25bps rate hikes in 2023, but likely to be brought forward to the first three months of 2023, bringing our terminal FFTR to 3.754.00% by end 1Q-2023.”