Still In The Box – A Review Of The Federal Reserve’s December Meeting Minutes

All eyes have been fixed on the Federal Reserve over the past year, with investors and markets earnestly searching for cues as to where we might be headed – soft landing, crippling economic recession, or something in between.

Predicting the severity of the landing may not be practical (for us or the Fed), however, we can look toward the available signals to assess how the Fed might move forward in the more immediate future – which can help us better prepare for the most likely market scenarios.

Federal Reserve officials held a policy meeting on December 13^th and 14^th. The recently published meeting minutes indicate that they are:

• Still firmly in the inflation fighting mode.
• Still “in the box” and trying to balance risks to inflation vs. risks to the economy.
• Dealing with inconsistent reports about the labor market.
• Unsure as to where the economy is headed and will react to incoming data.
• Asking: “Please markets, do not get exuberant about a “Fed pivot”. It makes our job harder.”

Some direct quotes from the minutes:

• “…job growth in 2022 may have been weaker than indicated…”
• “…there was considerable uncertainty around the consumer spending outlook.”
• “…the labor market had remained very tight…elevated nominal wage growth.”
• “…inflation data for October and November showed welcome reductions…but they stressed it would take substantially more evidence of progress…”
• “…uncertainty associated with their economic outlooks was high…weighted to the downside.”
• “No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.”
• “…an unwarranted easing in financial conditions, especially if driven by a misperception by the public…would complicate the Committee’s effort…”

And paraphrasing their own description of the box they are in:

“One risk…continued inflation eroding the purchasing power of households, especially for those already facing difficulty making ends meet.  The other risk…monetary policy could end up being more restrictive than necessary, lead to recession, potentially placing the largest burdens on the most vulnerable groups of the population.”

Regarding the job growth statistics, we turn to the Federal Reserve Bank of Philadelphia report for employment statistics for the quarter ended June 30, 2022.  “In the aggregate, 10,500 net new jobs were created during the period…the U.S. Bureau of Labor Statistics estimated net growth of 1,047,000 jobs for the period.”  Statistical variances such as this simply thicken the fog the Federal Reserve is driving through.

Nothing in the minutes contradicts our observation in our recent market commentary that “Optimism for a ‘Fed pivot’ should be considered judiciously”.