Employment growth, while moderating somewhat from its pace earlier in the year, had remained robust. Several participants observed that labor force participation remained below its pre-pandemic level because of the unusually large number of retirements during the pandemic and judged that the labor force participation rate was unlikely to move up considerably in the near term. A couple of participants raised the possibility that tight labor markets would spur investment in automation by firms, boosting labor productivity.
While labor markets were anticipated to remain tight in the near term, participants expected labor demand and supply to come into better balance over time, helping to ease upward pressure on wages and prices. As in the case of product markets, they anticipated that an appropriate firming of monetary policy would play a central role in helping address imbalances in the labor market. With the tightness in labor markets anticipated to diminish over time, participants generally expected the unemployment rate to increase, as the median projection of the unemployment rate in the June SEP showed a gradual rise over the next few years, reaching 4.1 percent in 2024. In light of the very high level of job vacancies, a number of participants judged that the expected moderation in labor demand relative to supply might primarily affect vacancies and have a less significant effect on the unemployment rate.
Participants noted that inflation remained much too high and observed that it continued to run well above the Committee's longer-run 2 percent objective, with total PCE prices having risen 6.3 percent over the 12 months ending in April. They also observed that the 12-month change in the CPI in May came in above expectations. Participants were concerned that the May CPI release indicated that inflation pressures had yet to show signs of abating, and a number of them saw it as solidifying the view that inflation would be more persistent than they had previously anticipated. They commented on the hardship caused by elevated inflation, with low- and moderate-income households especially affected. These households had to spend more of their budgets on essentials such as food, energy, and housing and were less able to bear the rapidly rising costs of these essentials. In that context, some participants noted that their contacts had reported that low- and moderate-income consumers were shifting purchases to lower-cost goods. Participants also stressed that persistently high inflation would impede the achievement of maximum employment on a sustained basis.
Participants judged that strong aggregate demand, together with supply constraints that had been larger and longer lasting than expected, continued to contribute to price pressures across a broad array of goods and services. They noted that the surge in prices of oil and other commodities associated with Russia's invasion of Ukraine was boosting gasoline and food prices and putting additional upward pressure on inflation. Participants commented on the global nature of inflation pressures, and a few of them added that many foreign central banks were also firming the stance of monetary policy. Several participants judged that a shift in spending from goods to services was likely to be associated with less upward pressure on prices in the goods sector, but also an intensification of upward pressure on prices in the services sector. Participants had revised up their PCE inflation projections for 2022 in their June SEP submissions, largely in response to higher-than-expected inflation readings and the slower anticipated resolution of supply constraints. They expected that the appropriate firming of monetary policy and an eventual easing of supply and demand imbalances would bring inflation back down to levels roughly consistent with the Committee's longer-run objectives by 2024 and keep longer-term inflation expectations well anchored.
Participants observed that some measures of inflation expectations had moved up recently, including the staff index of common inflation expectations and the expectations of inflation over the next 5 to 10 years provided in the Michigan survey. With respect to market-based measures, however, a few participants noted that medium-term measures of inflation compensation fell over the intermeeting period and longer-term measures were unchanged. While measures of longer-term inflation expectations derived from surveys of households, professional forecasters, and market participants were generally judged to be broadly consistent with the Committee's longer-run 2 percent inflation objective, many participants raised the concern that longer-run inflation expectations could be beginning to drift up to levels inconsistent with the 2 percent objective. These participants noted that, if inflation expectations were to become unanchored, it would be more costly to bring inflation back down to the Committee's objective.
In their discussion of risks, participants emphasized that they were highly attentive to inflation risks and were closely monitoring developments regarding both inflation and inflation expectations. Most agreed that risks to inflation were skewed to the upside and cited several such risks, including those associated with ongoing supply bottlenecks and rising energy and commodity prices. Participants judged that uncertainty about economic growth over the next couple of years was elevated. In that context, a couple of them noted that GDP and gross domestic income had been giving conflicting signals recently regarding the pace of economic growth, making it challenging to determine the economy's underlying momentum. Most participants assessed that the risks to the outlook for economic growth were skewed to the downside. Downside risks included the possibility that a further tightening in financial conditions would have a larger negative effect on economic activity than anticipated as well as the possibilities that the Russian invasion of Ukraine and the COVID-related lockdowns in China would have larger-than-expected effects on economic growth.
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