The Federal Open Market Committee (FOMC) met on June 13-14, 2023, to discuss the economic outlook and monetary policy. The minutes of the meeting were released on July 6, 2023.
Developments in Financial Markets and Open Market Operations
The minutes began by reviewing developments in financial markets. Policy-sensitive rates increased over the intermeeting period, reflecting indications of continued resilience in the economy, persistently elevated core inflation, and reduced downside tail risks following the resolution of the debt limit. The shift in policy expectations contributed significantly to higher Treasury yields. The increase in nominal yields primarily reflected higher real rates rather than inflation compensation. Broad equity prices rose, although the outperformance was concentrated in a handful of companies with a large market capitalization. Cyclical sectors fared better than sectors that tend to appreciate in a downturn, suggesting some reduced investor concern about downside risks to growth. Investor sentiment about the banking sector improved as perceived tail risks regarding regional banks appeared to have receded. Equity prices for regional banks rose over the intermeeting period but were still well below early March levels. Financial conditions indexes were roughly unchanged, as higher rates and a stronger dollar were offset by higher equity prices and narrower credit spreads.
Staff Review of the Economic Situation
The staff review of the economic situation began by discussing labor market conditions. The unemployment rate remained low in April and May, and the private-sector job openings rate was unchanged from its relatively high first-quarter average. Nominal wage growth continued to be elevated, although lower than its highs last year.
Consumer price inflation remained elevated. Total PCE price inflation had eased since the middle of last year, reflecting declines in consumer energy prices and softening consumer food price inflation, but recent readings for core PCE price inflation—which excludes changes in consumer energy prices and most consumer food prices and usually provides a better signal about future inflation than the more volatile total inflation measure—were little changed.
Real GDP appeared to be increasing modestly in the second quarter following its stronger first-quarter gain. Private domestic final purchases (PDFP)—which includes PCE, residential investment, and business fixed investment and often provides a better signal of underlying economic momentum than GDP—looked to be expanding more slowly in the second quarter than its robust first-quarter pace. For the first half as a whole, PDFP growth seemed to be more resilient than in the second half of last year.
Staff Review of the Financial Situation
The staff review of the financial situation concluded by discussing financial conditions. Market participants appeared to interpret incoming data as signaling, on balance, more resilience in economic activity than previously assumed and viewed communications from FOMC participants overall as pointing to a tighter path for policy than expected. As a result, Treasury yields and the expected future path for the federal funds rate shifted up.
The FOMC meeting minutes concluded by noting that the Committee would continue to monitor economic and financial developments closely and would adjust its policy stance as needed to achieve its objectives.
Implications for Investors
The FOMC meeting minutes suggest that the Federal Reserve is likely to continue to raise interest rates in an effort to combat inflation. This could lead to higher borrowing costs for businesses and consumers, which could weigh on economic growth. However, the minutes also suggest that the Committee is aware of the risks to growth and is committed to a “prudent” approach to monetary policy.
Investors should carefully monitor the economic and financial landscape in the coming months for signs of how the Fed’s tightening cycle will impact markets.