Minute of the Federal Open Market Committee September 21-22, 2021, and Summary of Economic Projections.

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System.

Abstract

The spread of the Delta variant of the COVID-19 virus weighed on the near-term growth outlook and marked down projections for gross domestic product (GDP) growth and revised up projections for inflation this year according to the Open Market Desk’s Survey of Primary Dealers.

Regarding the outlook for monetary policy, policymaker tapering of asset purchases could begin this year and end by July 2022, about one to two months earlier than in the previous surveys.

In Latin America and emerging Europe, some central banks recently tightened policy to address rising inflation pressures. Investors remained focused on other vulnerabilities in emerging markets, and concerns had grown recently about the possible implications of developments in China.

Market participants were attentive to negotiations on the debt limit, alert of information in the public domain about measures the Federal Reserve and the Treasury could take around a debt limit event, concerned that even with those procedures, a delayed payment would create severe and broad-based market disruption.

As for the repurchase agreement facilities, the Open Market desk had been working to onboard depository institutions as additional counterparties for the standing facility. In addition, a number of foreign central banks had expressed intent to establish access to the Foreign and International Monetary Authority Repurchase Agreement Facility.

As for the staff’s review of the economic situation, the information available in September suggested that U.S. real GDP was increasing in the third quarter at a slower pace than in the second quarter of the year. The pace of improvement in labor market conditions had remained very rapid in July but slowed sharply in August. Consumer price inflation in June and July—as measured by the 12-month percentage change in the personal consumption expenditures (PCE) price index—was elevated.

Total nonfarm payroll employment increased sharply in July but rose much less rapidly in August, with job gains in the leisure and hospitality sector slowing to zero. In addition, state and local government employment.

Private-sector job openings, as measured by the Job Openings and Labor Turnover Survey, increased further in July and continued to suggest that labor demand was extraordinarily high. Initial claims for regular state unemployment insurance remained near the pandemic-period low but were still somewhat elevated relative to pre-pandemic levels.

Recent monthly increases in average hourly earnings appeared to reflect a combination of continued strong labor demand and increased difficulties in hiring.

Inflation, as measured by either the personal consumption expenditures PCE price index or the consumer price index (CPI), had been boosted by a surge in demand as the economy reopened further, along with the effects of production bottlenecks and supply constraints. Total PCE price inflation was 4.2 percent over the 12 months ending in July, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 3.6 percent by July.

Concerns about the course of the pandemic appeared to be weighing on consumer services spending, as available indicators pointed to a slowing in demand for services sensitive to social distancing. Demand for housing appeared to have remained very strong, but incoming data suggested that materials shortages and a lack of developed lots for construction were restraining residential building activity.

Available indicators suggested that growth in business fixed investment was slowing somewhat in the third quarter as supply bottlenecks—particularly for motor vehicles—weighed on business equipment spending. Supply chain issues faced by a number of other industries also continued to be a drag on overall factory output.

The U.S. international trade deficit remained high in July. Bottlenecks in the global semiconductor industry continued to weigh on exports and imports of automotive products, and shipping congestion continued to restrain trade overall. Exports and imports of services rose again in July, but they remained low relative to pre-pandemic levels, largely because international travel was still depressed.

In the advanced foreign economies (AFEs), where high vaccination rates had increased resilience to COVID-19 outbreaks, incoming data were consistent with economic growth in the third quarter at a slightly faster pace than in the second quarter. With the economic reopening under way, purchasing managers indexes for both manufacturing and services remained strong in Europe and Canada. Conversely, in emerging market economies (EMEs)—especially in Southeast Asia, where vaccination rates were lower—a global resurgence in COVID- 19 infections due to the Delta variant led to renewals of public health restrictions. These restrictions weakened retail sales and contributed to labor shortages and transportation congestion, disrupting global supply chains. Inflation abroad was elevated, reflecting reversals of price declines early in the pandemic, past increases in energy and commodity prices, upward pressures from supply bottlenecks, and past exchange rate depreciations in some EMEs.

In the second half of 2021, supply constraints were expected to resolve more slowly than previously assumed; in addition, the recent rise in COVID-19 cases was viewed as likely to exert a larger amount of restraint on consumer spending, hiring, and labor supply than previously anticipated. Even so, real GDP was expected to post a sizable gain over the second half of 2021 and over the year as a whole, resulting in a correspondingly large decline in the unemployment rate. In 2022, GDP was expected to rise more slowly than in 2021 but at a still-solid pace, supported by the continued reopening of the economy and an easing of supply constraints.

Recent inflation data indicates that supply constraints are putting a larger amount of upward pressure on prices than previously anticipated; these constraints are expected to take longer to resolve. As a result, the 12-month change in personal consumption expenditures (PCE) price index is projected to hold roughly steady over the remainder of 2021 and to end the year well above the 2 percent target.

The risks around the inflation projection are tilted to the upside, with the possibility of more severe and persistent supply issues viewed as especially salient. In addition, there is a risk that longer-run inflation expectations would move appreciably higher and lead to persistently elevated inflation.

The projections of real GDP growth for the year were marked down, pointing to a reassessment of the severity and likely duration of supply constraints or of the effects of the spread of the Delta variant on the economy.

As already mentioned, firms in a number of industries were facing challenges keeping up with strong demand due to widespread supply chain bottlenecks as well as labor shortages. Retail industries were also facing various bottlenecks, including those stemming from port congestion and delays in ground transportation; these bottlenecks are not expected to be fully resolved until sometime next year or even later.

A summary of Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy, September 2021 is presented here: