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Inflation Risks To The Upside, With Bank Concerns Abating (4/4)


The Fed staff's end-2023 inflation forecasts actually declined in June (3.7% core PCE, 3.0% headline, vs respectively 3.8% and 3.1% in May's), with the usual assumptions of slower core goods and housing prices (the latter "considered to have about peaked"), with core nonhousing services "projected to slow gradually as nominal wage growth eased further".

  • Overall though the staff "saw the risks around the baseline inflation forecast as tilted to the upside, as economic scenarios with higher inflation appeared more likely than scenarios with lower inflation and because inflation could continue to be more persistent than expected and inflation expectations could become unanchored after a long period of elevated inflation."
  • FOMC participants noted that inflation declines "had been slower than they had expected", but interestingly "a few" noted that there were upside risks to housing services inflation (as MNI has pointed out, FOMC participants have expressed some concern over this, including Governors Waller and Bowman), with some remarking that core non-housing services inflation had shown few signs of slowing.
Lack of Bank Concern: While the decision to hold rates in June was in large part due to potential tightening effects from banking sector turmoil, Fed staff didn't seem overly concerned about the health of the banking sector, with "some easing of bank funding pressures" since March.
  • Though likewise there were signs of tightening working through the system: "borrowing costs for businesses, households, and municipalities increased notably over the intermeeting period", with lower-quality borrowers seeing tighter credit availability vs high credit score borrowers.
  • As for the FOMC itself, "several participants mentioned that credit conditions had not appeared to have tightened significantly beyond what would be expected in response to" existing monetary tightening, though "some" judged it was "still too early to assess with confidence".

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