Fed meeting notes: interest rates remain unchanged

summary

• At this meeting, the Federal Reserve kept interest rates unchanged.

• There was only one major change in the meeting statement, which was from "a lack of further progress" in the process of falling inflation at the previous meeting to "modest further progress" to reflect the improvement in inflation data (CPI) just released yesterday.

• QT Taper lands this month.

• The overall changes in the economic forecast are not significant. What is worth noting is that the inflation forecast has been slightly raised. Since the PCE inflation data for May has been announced as 2.8%, this forecast adjustment gives people the illusion that the inflation improvement has met the target .
  

• The interest rate dot plot fulfilled the "upward risks" in the previous March dot plot. 15 members believed that the interest rate should be cut this year, and there were differences of opinion on whether to cut once or twice .

• The long-term interest rate forecast was raised for two consecutive quarter-end meetings, reflecting a subtle change in the Fed officials' expectations for the central level of long-term interest rates, but Powell downplayed the significance of this change in the Q&A session .

• The dovish bias in the press conference was significantly weakened. The main reason was still that the previously released CPI data changed the look and tone of the press conference. The improvement in inflation data made Powell appear more at ease .

• The U.S. stock market maintained its upward momentum after the release of inflation data but then dived slightly , while U.S. Treasury yields and the U.S. dollar index rebounded after a sharp drop.

• The author believes that the Fed may clarify the conditions for cutting interest rates in the second half of the year at the Jackson Hole meeting in August this year , and Powell will also have more sufficient inflation data support by then.
  

Photo: The pattern on Powell's purple tie has changed to reflect modest further progress. From left to right are the four meetings in the first half of this year.

Figure: The improvement in inflation data gave Powell a sigh of relief and also changed the tone and atmosphere of the entire press conference.

Original statement (bold indicates key changes)

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee's 2 percent inflation objective.

Recent indicators suggest that economic activity continues to expand at a solid pace. Job gains remain strong, and the unemployment rate remains low. Inflation has eased somewhat over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee's 2 percent inflation objective.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and 2 percent inflation over the longer term. The Committee judges that the risks to achieving its employment and inflation goals have become better balanced over the past year. The economic outlook is uncertain, and the Committee remains highly concerned about inflation risks.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.

To support its goals, the Committee decided to maintain the target range for the federal funds rate unchanged at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect to reduce the interest rate until it has greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue to reduce its holdings of Treasury securities, agency debt, and agency mortgage-backed securities. The Committee is strongly committed to returning inflation to its 2 percent goal.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the achievement of the Committee's goals. The Committee's assessments will take into account a wide range of information, including its readings of labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Dot Plot and Economic Forecasts

Along with the small upward revision in inflation forecasts, interest rate forecasts were also raised .

The long-term interest rate forecast was raised by 0.2% at this meeting following the increase in March.

1 rate cut this year (7th place) vs 2 rate cuts (8th place)

Some interesting details from the conference

Repeat the risk-balanced management stance

We know that reducing policy restraint too soon or too much could result in a reversal of the progress we've seen on inflation. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.

We know that reducing policy tightening too early or too much could reverse progress on inflation; at the same time, reducing policy tightening too late or too little could unduly weaken economic activity and employment.

Do the Fed's interest rate forecasts reflect the newly updated economic data?

Data came out, I think it happened a couple meetings ago, a few meetings ago. So when that happens, when there's an important data print during the meeting, first day or second day, what we do is we make sure people remember that they have the ability to update , we tell them how to do that, and some people do, some people don't. Most people don't. And I'm not going to get into the specifics. But you have the ability to do that, so that what's in the SEP actually does reflect the data that we got today, to the extent you can reflect it in one day.

Fed officials will adjust their SEP forecasts for the day after the data is updated in real time ! It's just that most people don't do this.

Answering reporters' questions about the continuous upward revision of long-term interest rate forecasts

But I want to remember to point out that long run neutral rate of interest is a long run concept. It really is a theoretical concept, it can't be directly observed, and what it is is the interest rate that would hold the economy at equilibrium, maximum employment and price stability, for potentially years in the future where there are no shocks, so it's a little bit -- it's not something we observe today.

But back to your original question, people have been gradually writing it up because I just think people are coming it the view that rates aren't going to -- are less likely to go down to their prepandemic levels, which were very low by recent history measures.

He stressed that the long-term equilibrium interest rate level is unobservable, but also bluntly stated that many officials do believe that interest rates will not return to their historic low levels before the epidemic .

Answering the question about what the 25bp rate cut does

I think if you know, if you look back in five or ten years, and try to pull out the significance to the US Economy of one twenty five basis point rate cut, you'd have quite a job on your hands. So that's not how we look at it. don't I have no way of saying we're not at that stage, so I don't know.

Looking back at past history, it would be difficult to decompose the effect of a 25bp interest rate cut, but I believe that the launch of easing will be reflected in the financial market environment (general easing) and the market will price it.

(Here I would like to ask a question. In fact, the relaxation of the financial environment and related pricing require continuous forward guidance and easing commitments . If the interest rate cut cycle becomes bumpy in the future - for example, if the interest rate cut fails to bring signals of further interest rate cuts, how will the market price more easing at that moment? )

Answering questions about where inflationary pressures lie

You know, in some parts of non housing services , you see elevated inflation still, and that's probably to do with it could be to do with wages, goods, prices have kind of fluctuated.

Powell believes that the service industry (including housing and non-housing) deserves attention and wages are also high.