FOMC minutes highlight Inflation and mild recession

Regional bank failures prompt discussion of additional policy measures and potential recession

By Ahmed Azzam | @3zzamous | 5 July 2023

  • UK economy experiences setback in February 2023

  • Germany's inflation at a seven-month low, but still significantly higher than the target

  • Australia's job market remains stable with a steady unemployment rate

  • FOMC members anticipate additional policy measures to achieve restrictive policy stance

What’s happened?

The UK economy experienced a setback in February of 2023, with growth stagnating following an upward revision of 0.4% in January. This result fell below expectations of a 0.1% increase. Over the three months to February, the GDP recorded a modest growth of 0.1%. However, it is noteworthy that the UK's GDP is currently estimated to be 0.3% higher than its pre-coronavirus levels.

Meanwhile, Germany's consumer price inflation for March 2023 was confirmed at a seven-month low of 7.4% year-over-year, dropping from 8.7% in the previous two months, yet still remaining significantly higher than the European Central Bank's target of around 2%. This outcome indicates that Germany is facing continued price pressures, which could impact the broader European economy.

On the other hand, Australia's job market held steady in March 2023, with a seasonally adjusted unemployment rate of 3.5%, unchanged from February's near 50-year low and better than market estimates of 3.6%. However, the underemployment rate rose from 5.8% to 6.2%. Additionally, monthly hours in all jobs declined by 3 million or 0.2%, reaching 1,914 million.

These results suggest that while some economies are experiencing growth, others are struggling to keep up. The UK's modest growth, combined with Germany's stubborn inflation rates, reflects the ongoing uncertainty and unevenness of the global economic recovery. Meanwhile, Australia's job market has remained stable, but the increase in underemployment highlights the need for continued efforts to support labor market participation and reduce economic disparities.

What to watch?

The latest minutes from the Federal Open Market Committee's (FOMC) March 21st-22nd meeting indicate that FOMC members have observed persistently high inflation rates and a tight labor market. As a result, they anticipate that some additional policy measures may be necessary to achieve a sufficiently restrictive policy stance and return inflation to 2%.

However, the collapse of two regional banks has prompted several members to lower their assessments of the rate target range and raised concerns that the economy may slip into recession later this year. While several members believed it was appropriate to hold interest rates steady in March, others would have considered a 50 bps increase in the absence of the recent banking sector developments.

Despite this, the Fed ultimately decided to raise the fed funds rate by 25bps to 4.75%-5% in March, pushing borrowing costs to their highest levels since 2007.

Moving forward, market participants will keep a close eye on the Producer Price Index (PPI) and jobless claims data, with retail sales later in the week, followed by the Personal Consumption Expenditures (PCE) data at the end of the month. These indicators will provide insight into the strength of the US economy, as well as the potential for future interest rate adjustments.