Fed confident in 'restrictive' rate level while sounding notes of caution

Minutes from the Federal Reserve’s June meeting revealed confidence among central bankers that elevated interest rates were having the desired effect of cooling the economy toward a soft landing and 2-percent annual inflation.

“The vast majority of participants assessed that growth in economic activity appeared to be gradually cooling, and most participants remarked that they viewed the current policy stance as restrictive,” the June minutes, released Wednesday, revealed.

Fed officials held that current interest rate levels should be kept at their current level of 5.25 to 5.5 percent until inflation decreases further. The consumer price index fell to a 3.25-percent annual increase in May while the personal consumption expenditures price index dropped to 2.56 percent.

Some Fed bankers sounded notes of caution about a possible downturn in employment conditions as the need for more workers may be falling off.

“Several participants specifically emphasized that with the labor market normalizing, a further weakening of demand may now generate a larger unemployment response than in the recent past when lower demand for labor was felt relatively more through fewer job openings,” the minutes said.

A “number” of Fed officials noted “there was some risk that further cooling in labor market conditions could be associated with an increased pace of layoffs.”

Price pressures in the economy, juiced by both monetary and fiscal stimulus in the aftermath of the pandemic, were also easing, the Fed noted.

Bankers said “business contacts reported that their pricing power had declined” and that “evidence of firms’ reduced pricing power reflected increased customer resistance to price increases, slower growth in economic activity, and a reassessment by businesses of prospective economic conditions.”

Regarding overall financial stability, Fed officials still had their eye on the commercial real estate sector, recognizing that yields on commercial mortgage backed securities along with other types of corporate bonds “moved lower to still elevated levels relative to recent history.”