"The economic forecast prepared by the staff for the June FOMC meeting continued to assume that the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery," the minutes said, referring to the June 14 meeting of the Fed's policy-making Federal Open Market Committee (FOMC).
While a recession was still possible, discussion among FOMC policy-makers led to the conclusion that the jobs market and consumer-driven economy might be stronger-than-thought, the central bank said.
"Given the continued strength in labor market conditions and the resilience of consumer spending, however, the staff saw the possibility of the economy continuing to grow slowly and avoiding a downturn as almost as likely as the mild-recession baseline," the Fed minutes said.
The economy, measured by real gross domestic product, grew by an annualized 2% in the first quarter of this year, the Commerce Department said last week in a report that would have likely brought relief to the Fed that its rate hikes had not weighed too much on growth.
"On balance, 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," the Fed said in its June meeting minutes.
The Personal Consumption Expenditures, or PCE, Index — an inflation indicator closely followed by the Fed — grew 3.8% in the year to May. Core PCE, a component of the index stripped of volatile food and energy prices, expanded by 4.6%. The Fed’s tolerance for inflation is a mere 2% per annum.
The Fed has a mandate of ensuring "maximum employment" through a jobless rate of 4% or below, and keeping inflation "manageable." The last was a task easily achieved before the COVID-19 breakout, when prices expanded less than 2% a year. The pandemic and the trillions of dollars of relief spending by the government, however, triggered runaway inflation since mid-2021.
The labor market is currently the juggernaut of the US economy, adding hundreds of thousands of jobs a month over the past three years after initially losing 20 million to the COVID-19 pandemic.
While policy-makers over the world typically celebrate on seeing good jobs numbers, the Fed is in a different predicament. The central bank wishes to see an easing of conditions that are a little "too good" now for the economy’s own good — in this case, unemployment at more than 50-year lows and average monthly wages that have grown without stop since March 2021.
Such job security and earnings have cushioned many Americans from the worst price pressures since the 1980s and encouraged them to continue spending, further feeding inflation.