Fed Meeting Minutes May Point to Endgame Rate Hike, New Round of Debate

WASHINGTON, Jan 4 (Reuters) – The Federal Reserve ended 2022 with a firm promise at its December policy meeting that interest rates would continue to rise this year, but at a slower pace and possibly be only three-quarters of a percentage point higher.

The reading from that session, due out Wednesday at 2:00 p.m. EST (19:00 GMT), could provide additional insight into how the end of the current tightening cycle will play out and how far Fed officials are beginning to weigh the risks to economic growth. .. against their primary concern about inflation.

The general tone of the minutes is still likely to show that inflation ranks first among policy makers. It has been slowing for several months, but in November the Fed’s favorite gauge of inflation – the personal consumption expenditure price index – was still rising at an annual rate of 5.5%, more than double the the US central bank’s 2% target.

The minutes will “oppose premature easing” and maintain focus on the likelihood of rates rising further and remaining high, LH Meyer economist Derek Tang wrote on Tuesday.

But the details of the document, with its descriptions of different viewpoints and the approximate size of the groups of policymakers proposing them, could show that the Fed’s internal deliberations are entering a new phase where risks to economic growth and the jobs are more important.

Fed officials’ projections released on Dec. 11. 14 showed near-unanimity on the direction interest rates will take in 2023, with 15 of 19 policymakers expecting the target rate to rise by three-quarters of a percentage point or a full percentage point in the coming months, a narrow range that would see the current rate end the cycle this spring with this rate around 5.25% or 5.5%.

But in 2024, the projections diverge dramatically, with one official seeing the policy rate stay at 5.625%, another seeing it cut to 3.125%, and no more than seven officials agreeing on a particular rate in an economy that could still flirt. with or going through a recession.

“The FOMC appears united in moving policy above 5%, but is quite divided on the exit strategy; how long to hold and how deeply and quickly to ease on the other side,” Tang wrote, referring to central bank policy. Federal Open Market Committee.

KNOWLEDGE OF RISKS

The minutes could help pinpoint the sentiment of accelerating the pace of upcoming rate hikes to a quarter of a percentage point starting Jan. 1. 31-Feb. 1 meeting. The Fed used three-quarters of a percentage point hikes for much of 2022, but cut that to a half a percentage point increase in December and indicated he could slow the pace further as he searches for a suitable stopping point.

New economic data by then will shape that decision. Closely watched statistics on job creations in the United States will be released before the minutes on Wednesday, followed on Friday by the monthly jobs report for December – two important benchmarks for Fed officials who hope the American labor market will adjust to slower growth and higher interest rates with limited job loss.

Consumer inflation data for December will be released next week.

Although Fed Chairman Jerome Powell remained adamant in December that the central bank would do the right thing to control inflation, he also said officials were aware of the risks of doing so. too much – something Fed staff also started pointing out.

In minutes of the Nov. 1-2 meeting, Fed staff put roughly the same odds on a recession in 2023, and new research late last month warned that with major banks world centrals simultaneously raising rates, the combined impact could be larger than expected as policy in one country influences bond yields, currency values ​​and business patterns in another.

“It is particularly difficult to estimate the fallout, and there are concerns that policymakers may underestimate it. In such a case, there is a risk of excessive tightening which central banks must be aware of, and we believe that they are , aware,” said Fed economist Dario Caldara. , Francesco Ferrante and Albert Queralto wrote.

Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao

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howard schneider

Thomson Reuters

Covers the US Federal Reserve, monetary policy and economics, graduated from the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, business reporter and local Washington Post staffer.