FOMC Minutes: Most officials see inflation jump subsiding

Yahoo Finance’s Brian Cheung breaks down the latest Fed minutes.

Video Transcript

KRISTIN MYERS: Let's turn now to Yahoo Finance's Brian Cheung. He's been looking at all of those Fed minutes. Brian, what have you been able to pull out just over the last five or six minutes or so?

BRIAN CHEUNG: Yeah, not a lot of time at all for what was a particularly meaty and substantive June FOMC meeting. We have to remember that these minutes cover a meeting and a decision from the Fed that was three weeks ago. So many things have changed since that point in time. But of course, all eyes on the taper talk discussion.

Again, prior to that meeting, the Federal Reserve had been saying it wasn't thinking about thinking about tapering its asset purchases or raising interest rates. But we did hear from Jay Powell three weeks ago saying that they had kicked off those discussions in that last meeting, even though they're not yet announcing any sort of timeline on paring back its $120 billion of pace each month of asset purchases.

So let's take a look at where they saw the employment and inflation situation. So the minutes noting that job gains which, at the time, covered the months of April and May-- they didn't have the June jobs report at the time-- were, quote, "strong, but weaker than they had expected." So that shows some of the, I guess, waning optimism, as the Federal Reserve earlier in the spring had been hoping for something closer to one million a month in terms of the pace of job gains. We were getting something closer to 400,000 in the months of April and May.

On the inflation front, a lot of people concerned about whether or not these temporary inflationary increases could be more permanent. The minutes noting, quote, "Participants generally expected inflation to ease as the effect of these transitory factors dissipated, but several participants remarked that they anticipated that supply chain limitations and input shortages would put upward pressure on prices into next year."

Translation-- yes, it could be transitory, some of these pressures that we've seen on PCE and CPI, but don't expect those to get alleviated in the next year. We could continue to see high readings into 2022. But that doesn't mean it's not transitory. It could still fade away after that point. So it shows most Fed officials not necessarily too worried about inflation running away, at least right now.

Now, of course, the question is, what about tapering? Now the minutes note that the committee standard of substantial further progress-- this is kind of the bright line test the Fed set for itself on asset purchases-- was, quote, generally seen as not having yet been met, though participants expected progress to continue.

And then an interesting bit, there were a number of Fed officials that appeared to already argue that they need to watch out for any bumps around the side of the bend. Quote, "Participants generally judge that as a matter of prudent planning. It was important to be well-positioned to reduce the pace of asset purchases if appropriate in response to unexpected economic developments," which they later cited as maybe faster than expected growth on GDP, employment, inflation, what have you.

And then one last thing I want to point out because I've been ranting a bit here, guys, but mortgage-backed securities as they talk about the nuances of how to taper that, there's been some discussion that, well, the mortgage market has been a particularly hot. The housing market doesn't need the help. Why is the Fed buying mortgage-backed securities? That debate apparently kicked off in that last meeting.

Quote, "Several participants saw benefits to reducing the pace of these purchases more quickly or earlier than the Treasury purchases," which is the other side of its asset purchases. But there was another contingent of the FOMC that was saying maybe you should reduce the treasuries and the mortgage-backed securities at the same rate. So that seems like a debate that could be heating up in the next few months. But again, no necessary announcement from that meeting.

And then the dot plot projection, that's not something that's part of the discussions in these meetings. So we don't have any sort of detail on how some of these Fed officials project interest rate hikes in the future. But I think that in a nutshell kind of describes what we saw from the minutes. Of course, the next meeting is going to be in July, in which case we'll have an update on where Fed policy may be at that point, guys.

KRISTIN MYERS: All right, thanks so much, Brian Cheung, for, again, poring into that incredibly quickly and being able to pull out all of that very important data points. And of course, everyone should check out YahooFinance.com. I know Brian's going to have a nice, lengthy write-up for everyone to take a look at.