Participants View Current Inflation Pressures as “Transitory”

• The minutes from the late April FOMC meeting indicate no immediate change in monetary policy.
• FOMC participants want to see a broad-based improvement in the labor market and consistently higher inflation before reducing purchases of long-term assets.
• The FOMC expects inflation to accelerate temporarily in the near term, before slowing later in 2021. A more sustained acceleration in inflation will come later this year and in 2022. The committee expects inflation to remain under control.
• PNC expects the FOMC to start reducing its asset purchases in early 2022, with the next increase in the fed funds rate coming in late 2023.

Monetary policy will remain extremely aggressive in the near term, according to the minutes from the Federal Open Market Committee’s meeting on April 27 and 28. Participants agreed that the economy was recovering from the pandemic, but that the labor market “was far from achieving the Committee’s broad-based and inclusive maximum employment goal.” The “broad-based” reference means that the FOMC wants to see improvement across the labor market, especially across demographic groups, and not just a low unemployment rate.

Participants expected inflation to pick up in the near term, especially on a year-ago basis. They noted the low level of prices in the immediate aftermath of the pandemic in the spring of 2020, as well as current supply bottlenecks in some parts of the economy that are pushing up prices. But participants expected these factors to fade in the months ahead and inflation to slow. Over the longer-term “participants expected inflation to be at levels consistent with achieving the Committee’s objectives over time,” that is, inflation averaging 2% using the personal consumption expenditures price index. Some participants did say that supply chain bottlenecks could last longer than originally expected, leading to upward price pressures into 2022. Overall, however, “many participants commented that various measures of longer-term inflation expectations remained well anchored at levels broadly consistent with achieving the Committee’s longer-run goals.”

There was general agreement that the FOMC would wait to tighten monetary policy until there was actual progress toward the FOMC’s objectives for the labor market and inflation, rather than just forecasted progress: “some participants emphasized that an important feature of the outcome-based guidance was that policy would be set based on observed progress toward the Committee’s goals, not on uncertain economic forecasts.” However, a couple of participants did express concern about “the risks of inflation pressures building up to unwelcome levels before they become sufficiently evident to induce a policy reaction.”

Participants generally agreed that it would be “some time” before the economy made enough progress toward the committee’s objectives to reduce the Fed’s purchases of long-term Treasurys and mortgage-backed securities (quantitative easing). They also agreed that it would be important to clearly indicate progress toward these objectives to provide sufficient warning to financial markets well ahead of any reduction in asset purchases. The minutes do say that a “number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” This does not mean that a reduction in asset purchases is imminent, only that the Fed could start preparing markets for a reduction in purchases sometime over the next few months.

The minutes from the April 27-28 FOMC meeting do not change the outlook but do provide more clarity on the near-term path of monetary policy. The FOMC is not yet ready to trim its asset purchases but could announce that it is preparing to do so in the months ahead. The path of monetary policy will depend on actual economic results, and not forecasts. And FOMC members expect that inflation, after moving temporarily higher in the spring of 2021, will slow somewhat later in the year before picking up more consistently later this year and in 2022.

The FOMC meeting was before the release of the April consumer price index, which reported much stronger than expected inflation in April. But much of the increase in inflation came in just a few segments of the economy-used vehicles, rental cars, and airfares-that will not persist. In addition, the FOMC’s preferred inflation measure is the personal consumption expenditures price index, which tends to run more slowly than the CPI. The Bureau of Economic Analysis will release the April PCE price index on May 28.

PNC expects the FOMC to reduce asset purchases in early 2022, after signaling that in the late summer or early fall. PNC does not expect the FOMC to raise the federal funds rate until the second half of 2023.

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