Federal Reserve officials seemed divided evenly into two camps about the outlook for inflation, according to minutes of their March meeting released on Wednesday.
“Several” Fed officials said that supply bottlenecks and strong demand would push up price inflation “more than anticipated,” the minutes said.
At the same time, “several” other Fed officials expressed belief that the factors that had contributed to low inflation over the past decade “could again exert more downward pressure on inflation than expected.”
The Fed upgraded its forecast for growth and employment and forecast that headline inflation would rise to 2.4% rate this year — above the 2% target — but then settle down to 2.1% by 2023.
Despite these changes, the Fed’s median forecast was for no liftoff in interest rates through 2023.
The central bank cut its policy interest rates to zero last March.
The Fed said it would maintain this easy stance until the economy returns to full employment, and inflation has risen to 2% and was on track to rise moderately above 2% for some time.
At the same time, the Fed is buying $80 billion of Treasurys and $40 billion of mortgage-backed securities to help the economy. The Fed has said it would continue these purchases until there is “substantial further progress” in reaching its low unemployment and steady inflation goals.
Markets are focused on when the Fed might make a tapering announcement of the asset purchases.
The minutes said that it would be “some time” until substantial further progress would be realized.
Fed officials said they were happy with the current guidance for the federal funds rate and asset purchases.
“They noted that a benefit of outcome-based guidance was that it did not need to be recalibrated often in response to incoming data or the evolving outlook,” the minutes said.
Fed Chairman Jerome Powell continues to resist providing the calendar-type guidance the market craves, noted Krishna Guha of Evercore ISI. Guha said he thinks the Fed will signal its future taper plans in August and start tapering in January.
According to the minutes, the Fed staff’s forecast in March was “considerably stronger” than the January forecast.
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The economy appeared to be picking up at the beginning of the year by more than expected and the $1.9 trillion stimulus package passed by Congress was considerably larger than the staff had presumed.
The staff said that growth would only slow slightly in 2022 and 2023, “leading to a decline in the unemployment rate of historically low levels.”
The Fed staff sees inflation running a bit below 2% in 2022 and then reach the central bank’s 2% target in 2023.
But “various” Fed officials noted that changes in policy should be based primarily “on observed outcomes rather than forecasts.”
Currently, the economy “was far from achieving the Fed’s broad-based and inclusive goal of maximum employment,” Fed officials said.
The bond market continues to price in larger and faster rate increases than the Fed. The market sees about an 80% chance of a quarter-point hike in 2022, said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.
In an interview on CNBC, Fed Governor Lael Brainard was asked if she welcomed the rise in long-term market interest rates.
Brainard said that market participants “do really understand the new forward guidance” the Fed is providing.
“They seem to have expectations around the conditions both for inflation and employment that seem broadly consistent” with the forward guidance, she said. Brainard said she would be concerned with “disorderly conditions like we saw on February 25.”
On that day, a poor auction of seven-year Treasury notes pushed long-term interest rates
up sharply, causing some panic in the markets.
Roberto Perli, a former Fed staffer and now an analyst at Cornerstone Macro, said the minutes “make clear that the pushback from the Fed against the market expectations of early and faster hikes than the Fed is communicating is likely to be only verbal.”