Board of Governors: Minutes of the Federal Open Market Committee June 14–15, 2022; Borrowing Costs Had Continued to Increase in Many Sectors Since the Previous FOMC Meeting

Board of Governors: Minutes of the Federal Open Market Committee June 14–15, 2022; Consumer Price Inflation Remained Elevated

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Monetary policy in the United States comprises the Federal Reserve's actions and communications to promote maximum employment, stable prices, and moderate long-term interest rates — the economic goals the Congress has instructed the Federal Reserve to pursue. Board of Governors, June 14 - 15, 2022

Staff Review of the Economic Situation
The information available at the time of the June 14 – 15 meeting suggested that U.S. real gross domestic product (GDP) was rebounding to a moderate rate of increase in the second quarter after having declined in the first quarter. The labor market remained very tight, but there were some signs that momentum was slowing. Consumer price inflation — as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE) — remained elevated in April, and available information suggested that inflation was still elevated in May.

Total nonfarm payroll employment rose solidly in April and May, though the pace of increase was slower than in the first quarter, and the unemployment rate remained unchanged at 3.6 percent. The unemployment rates for African Americans and for Hispanics were little changed, on net, though both rates remained noticeably higher than the national average. On net, the labor force participation rate edged down between March and May, while the employment-to-population ratio was unchanged. The private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, edged lower in April but remained at a high level. Nominal wage growth remained elevated, with average hourly earnings having risen 5.2 percent over the 12 months ending in May, and the increases were widespread across industries.

Consumer price inflation remained elevated. Total PCE price inflation was 6.3 percent over the 12 months ending in April, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 4.9 percent over the same period. The trimmed mean measure of 12‑month PCE price inflation constructed by the Federal Reserve Bank of Dallas was 3.8 percent in April, nearly 2 percentage points higher than its year-earlier rate of increase. In May, the 12-month change in the CPI was 8.6 percent, while core CPI inflation was 6.0 percent over the same period. Measures of inflation expectations derived from surveys of professional forecasters and of consumers generally suggested that inflation was expected to remain high in the short run but then fall back toward levels consistent with a longer-run rate of 2 percent.

Production and spending indicators were mixed but generally remained strong. Consumer spending and industrial production posted sizable gains in April. However, retail sales declined in May, data on home sales and single-family housing starts moved down in April, some indicators of manufacturing activity weakened in May, and the University of Michigan Surveys of Consumers measure of consumer sentiment decreased noticeably in the preliminary June reading. Supply disruptions appeared to have improved in some sectors (such as general merchandise retailers) but to have deteriorated in others (such as materials for home construction). On balance, the available indicators suggested that private domestic final purchases were increasing at a slower pace in the second quarter than in the first quarter. And with the available trade data for April pointing to a rebound in exports and a moderation in import growth in the second quarter, GDP growth appeared to be rebounding after having declined in the first quarter.

Regarding trade, real imports of goods stepped back in April from their exceptional strength in March, driven by a decline in consumer goods imports. By contrast, real goods exports grew in both March and April after declining in the previous two months, following some normalization in categories such as soybeans and pharmaceuticals, which can exhibit large and idiosyncratic changes. Exports and imports of services continued to be held back by an incomplete recovery of international travel. The nominal U.S. international trade deficit widened to a record size in March and then reversed that widening in April.

Incoming data suggested that the global reverberations from lockdown measures to deal with the spread of the COVID-19 virus in China and the Russian invasion of Ukraine slowed foreign economic growth. In China, activity indicators pointed to a sizable restraint on economic activity. The Russian invasion of Ukraine continued to have an imprint on foreign activity, with persistent stresses in global commodity markets and declining consumer and business confidence, especially in Europe. Inflation abroad moved higher, driven by further increases in consumer energy and food prices as well as some additional broadening of price pressures to core goods and services. Central banks around the world further tightened their monetary policy stances to curb high inflation.

Staff Review of the Financial Situation
Over the intermeeting period, U.S. Treasury yields and the market-implied federal funds rate path moved substantially higher on net. Broad domestic equity price indexes declined considerably, on balance, amid elevated market volatility. In most advanced foreign economies (AFEs), sovereign yields also increased further, and foreign equity price indexes moved lower. Despite further increases in borrowing costs, financing conditions in domestic credit markets remained generally accommodative. The credit quality of firms, municipalities, and households remained largely stable, although the outlook for credit quality had begun to deteriorate somewhat.

Since the previous FOMC meeting, 2-, 5-, and 10-year nominal Treasury yields increased considerably on net. Early in the intermeeting period, Treasury yields moved lower amid rising concerns about a weakening U.S. growth outlook and Federal Reserve communications perceived as lowering the chances of large policy rate hikes at upcoming meetings. However, yields increased late in the period, with economic data releases largely being interpreted as highlighting the possibility of a more aggressive tightening of monetary policy. The expected federal funds rate path—implied by a straight read of overnight index swap quotes—also increased notably on balance. Real yields increased more than their nominal counterparts, while inflation compensation implied by Treasury Inflation-Protected Securities declined.

Broad equity price indexes fell sharply over the intermeeting period on net. The stock price declines were largely associated with mixed corporate earnings news early in the period and increasing concerns about the economic outlook amid global policy tightening. One-month option-implied volatility on the S&P 500 index—the VIX—increased moderately, on balance, remaining elevated relative to its historical distribution and significantly above average pre-pandemic levels. Spreads on investment-grade and, to a greater extent, speculative-grade corporate bonds widened notably, on net, reaching levels comparable with those at the end of 2018. This widening of spreads was associated with increased concerns about the outlook for corporate credit amid monetary policy tightening. Since the previous FOMC meeting, spreads on municipal bonds narrowed substantially, on net, moving near levels observed for several years before the pandemic, as investor demand exhibited some recovery over much of the period from earlier weak levels.

Conditions in short-term funding markets remained stable over the intermeeting period, with the May increase in the Federal Reserve's administered rates passing through promptly to overnight money market rates. Spreads on longer-tenor commercial paper (CP) and negotiable certificates of deposit narrowed moderately, with no signs of spillovers beyond the stablecoin market following the collapse of a large algorithmic stablecoin. Indeed, CP outstanding increased slightly over the period. Money market fund (MMF) net yields across all fund types rose notably, as increases in administered rates passed through to money market instruments. Secured overnight rates softened significantly relative to the ON RRP offering rate since the May FOMC meeting, with the downward pressure on rates attributed to continuing declines in net Treasury bill issuance, elevated demand for collateral in the form of Treasury securities, and MMFs maintaining very short portfolio maturities amid uncertainty about the pace of anticipated policy rate increases. Consistent with the downward pressure on repo rates, daily take-up in the ON RRP facility increased further.

Sovereign yields in most AFEs rose over the intermeeting period amid investors' concerns about further inflationary pressures and major central banks' policy communications suggesting a firmer stance of policy. Interest rate volatility in AFEs increased, consistent with increased uncertainty about the path of policy rates. Concerns about the global growth outlook weighed on equity prices, and the broad dollar edged up. Implied equity price volatility remained at elevated levels. Japanese yields and equity prices, however, ended the period about unchanged, as the BOJ reaffirmed its accommodative monetary policy stance. Sovereign bond spreads over German bund yields for euro-area peripheral countries widened further. These moves were partially retraced following an unscheduled meeting of the ECB on June 15, at which the ECB indicated that it would take action to address potential fragmentation risk in euro-area sovereign bond markets. Outflows from emerging market-dedicated funds intensified in early May, especially from local currency bond funds, and credit spreads in emerging market economies widened moderately.

In domestic credit markets, financing conditions for most businesses and households remained generally accommodative over the intermeeting period. Credit remained widely available, particularly to higher-rated firms and consumers with higher credit scores. Gross nonfinancial corporate bond issuance slowed in May, especially among speculative-grade issuers, amid elevated market volatility and high yields. Gross institutional leveraged loan issuance decelerated and initial public offering volumes remained extremely slow in May, while gross issuance of municipal bonds remained robust.

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Board of Governors: Minutes of the Federal Open Market Committee June 14–15, 2022; Consumer Price Inflation Remained Elevated

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