A quick comment to the newly released Nov FOMC minutes.
In a great summary: the FOMC continues to be split and Powell’s communication continues to disproportionally represent the dovish majority.
On the one hand, the majority of participants who religiously follow the Fed Board staff. The list includes the holy trio: Powell, Brainard, and Williams. On the other hand, some of the regional Fed Presidents who think that inflation will be more persistent and consequently advocate for a more aggressive policy action. As for the staff, unsurprisingly the Fed staff continued to forecast core PCE price inflation at 1.9 percent in 2023 and 2.0 in 2024 as anticipated in our “The Shadow Forecast” (“Pre Nov ’21 FOMC package”). However, the staff has increased marginally its 2022 forecast to 2.0; a move that we evaluate as entirely judgmental (that is, attributed entirely to the “other” factors in the decomposition – see below for chart/table).
At the November 2021 press conference Powell communicated only the point of view of the majority of participants who are fully onboard with the Fed staff view. We believe this will be the case also at the December meeting.
Inflation outlook
The doves
“Inflation was elevated, largely reflecting factors that were expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy had contributed to sizable price increases in some sectors”. “Participants generally saw the current elevated level of inflation as largely reflecting factors that were likely to be transitory but judged that inflation pressures could take longer to subside than they had previously assessed”. “These participants also noted that the most sizable price increases may have already occurred, that there was as yet little evidence of a change in inflation dynamics—such as the development of a wage–price spiral—that would tend to prolong elevated levels of inflation, and that forces already in motion would likely bring inflation down toward 2 percent over the medium term.”
The hawks
“Some participants highlighted the fact that price increases had become more widespread. […] Nonetheless, they indicated that their uncertainty regarding this assessment had increased.”
Policy actions
The doves
“Because of the continuing considerable uncertainty about developments in supply chains, production logistics, and the course of the virus, a number of participants stressed that a patient attitude toward incoming data remained appropriate to allow for careful evaluation of evolving supply chain developments and their implications for the labor market and inflation”.
The hawks
“Some participants suggested that reducing the pace of net asset purchases by more than $15 billion each month could be warranted so that the Committee would be in a better position to make adjustments to the target range for the federal funds rate.” “Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives”.
Staff
“The staff’s near-term outlook for inflation was revised up, as consumer food and energy prices had risen faster than expected and production bottlenecks and recent wage gains were seen as putting somewhat greater upward pressure on prices than had been anticipated. As a result, the 12-month change in PCE prices was projected to move up further relative to September’s pace and to end the year well above 2 percent. Over the following two years, the boost to consumer prices caused by supply issues was expected to partly reverse, and resource utilization was projected to tighten further. PCE price inflation was therefore expected to step down to 2 percent in 2022 and to 1.9 percent in 2023 before edging back up to 2 percent in 2024.”
The table and chart below show our best guess of the Fed Board staff decomposition submitted to the FOMC at the November 2021 FOMC meeting.
Figures and Tables
Table 1
Note: Details may not sum to totals because of rounding. The “other factors” line includes the contribution of core non-market inflation, as well as the contributions of factors that are unrelated to other fundamentals. The “Board staff” forecast is inferred from the FOMC minutes. The “FOMC” forecast refers to the median SEP.
Figure 1
