Federal Reserve Kept Rates Unchanged; Eases Financial Conditions

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    Helmholtz Watson

    The Federal Reserve kept rates unchanged in a target range of 5.25-5.50% in unanimous vote at their November FOMC. Fed said economic activity grew at
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    November FOMC minutes:
    Economic Growth and Consumer Spending:
    Real GDP expanded strongly in Q3, driven by a surge in consumer spending.
    Despite robust growth, aggregate demand and supply are becoming more balanced due to restrictive monetary policy and normalizing supply conditions.
    Consumer spending data has been stronger than expected, supported by a strong labor market and solid household balance sheets.
    Some participants noted a weaker consumer demand picture than indicated by aggregate data.
    Several participants suggested that repeated upside surprises in spending data could indicate sustainable momentum.
    A couple of participants theorized that households might have more financial resources than previously thought.

    Labor Market:
    The labor market remains tight but has eased, partly due to recent increases in labor supply.
    Labor supply and demand are coming into better balance, with labor force participation rising, especially among women, and immigration boosting labor supply.
    Various measures indicate some easing in labor demand, including lower job openings and quits rates.
    The pace of nominal wage increases has moderated.
    A few participants noted that nominal wages are still rising at rates above levels consistent with the 2% inflation objective.

    Inflation has moderated over the past year but remains high and above the 2% goal.
    A period of below-potential GDP growth and further softening in labor market conditions is likely needed to reduce inflation.
    Core PCE price inflation measures have declined, but progress in reducing core services inflation excluding housing is limited.
    Longer-term inflation expectations remain well anchored.
    Inflation continues to harm businesses and households.

    Monetary Policy and Financial Conditions:
    Current monetary policy is restrictive, putting downward pressure on economic activity and inflation.
    All participants agreed to maintain the target interest rate at 5.25% – 5.5%.
    Financial conditions have significantly tightened, largely due to a substantial increase in longer-term Treasury yields.
    Many participants observed the rise in longer-term yields was driven by an increase in term premiums on Treasury securities.
    Some participants suggested the rise in yields might reflect expectations for a higher federal funds rate path.
    Further tightening of monetary policy may be needed if progress toward the inflation objective is insufficient.
    All participants judged that policy should remain restrictive until inflation is sustainably moving toward the objective.

    Business Sector and Investment:
    Business fixed investment was flat in Q3, with conditions varying across industries and Districts.
    Some participants noted benefits for businesses from improved hiring ability, supply chains, and reduced input costs.
    A few participants reported difficulties for businesses in passing on cost increases to customers.
    Several participants commented on the resolution of the United Auto Workers strike reducing business-sector uncertainty.
    Several participants noted the impact of higher interest rates on businesses, with firms cutting or delaying investment plans.
    A few participants highlighted challenges for small businesses due to tighter financial and credit conditions.
    A few participants mentioned the impact of higher interest rates on the agricultural sector.

    Risks and Uncertainties:
    Participants generally noted high uncertainty in the economic outlook.
    Upside risks to economic activity include the persistence of factors behind strong spending.
    Downside risks include larger-than-expected effects of policy tightening and tighter financial conditions.
    Upside risks to inflation include the possibility of stalled disinflation or reacceleration of inflation.
    Downside risks to economic activity include potential disruptions to global oil markets.
    Most participants continued to see upside risks to inflation.
    Many participants noted downside risks to economic activity, including potential effects on aggregate demand and the CRE sector.

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