WASHINGTON — Federal Reserve officials are determined to fight inflation and expect higher interest rates to stay in place until more progress is made, released minutes show. Wednesday of the central bank’s December meeting.
At a meeting where policymakers raised their policy interest rate another half a percentage point, they expressed the importance of keeping tight policy in place as inflation remains at an unacceptable level.
“Participants generally observed that tight policy should be maintained until incoming data provided assurance that inflation was on a sustained downward path to 2%, which should take some time,” says the summary of the meeting. “Given the persistent and unacceptably high level of inflation, several participants said historical experience cautions against premature easing of monetary policy.”
The increase ended a streak of four consecutive three-quarter-point rate hikes, while raising the target range for the benchmark federal funds rate to 4.25%-4.5%, its highest level in 15 year.
Officials also said they would focus on data as they move forward and see “the need to retain flexibility and option” in policy.
Officials further cautioned that the public should not overinterpret the Federal Open Market Committee’s decision to set rates to reduce the pace of increases.
A number of participants stressed that it would be important to make it clear that a slowdown in the pace of rate hikes did not signal a weakening of the Committee’s commitment to achieving its price stability objective. or a judgment that inflation was already on a persistent way down,” the minutes read.
Following the meeting, Fed Chairman Jerome Powell indicated that while progress has been made in tackling inflation, he has seen only signs of stopping and expects that rates remain at higher levels even after the increases end.
The minutes reflected those sentiments, noting that no FOMC member expects rate cuts in 2023, despite market prices.
Markets are currently pricing in the likelihood of rate increases totaling between 0.5 and 0.75 percentage points before pausing to gauge the impact of the increases on the economy. Traders expect the central bank to approve a quarter-point increase at the next meeting, which ends on February 1. 1, according to CME Group data.
Current pricing also indicates the possibility of a slight reduction in rates by the end of the year, with the funds rate hovering around a range of 4.5% to 4.75%. Fed officials, however, have repeatedly expressed doubts about any policy easing in 2023.
Moments noted that officials are grappling with two-pronged political risks: first, that the Fed won’t keep rates high long enough and let inflation fester, as in the 1970s; and second, that the Fed maintains its restrictive policy for too long and slows the economy too much, “potentially placing the heaviest burdens on the most vulnerable segments of the population.”
However, members said they saw the risks weighed more heavily on easing too soon and allowing inflation to run wild.
“Participants generally indicated that upside risks to the inflation outlook remained a key factor determining the policy outlook,” the minutes read. “Participants generally observed that maintaining tight policy for an extended period until inflation is clearly on the 2% path is appropriate from a risk management perspective.”
Along with the rate hikes, the Fed has reduced the size of its balance sheet by allowing up to $95 billion in proceeds from maturing securities to roll over each month rather than being reinvested. In a program launched in early June, the Fed saw its balance sheet shrink from $364 billion to $8.6 trillion.
While some of the recent inflation measures have shown progress, the labor market, a critical target of rate hikes, has been resilient. Growth in nonfarm payrolls has exceeded expectations for most of the past year, and data released earlier on Wednesday showed the number of job openings is still nearly double the pool of available workers. .
The Fed’s favorite inflation indicator, the personal consumption expenditure price index less food and energy, was 4.7% a year in November, down from its peak of 5, 4% in February 2022, but still well above the Fed’s 2% target.
Economists, meanwhile, widely expect the United States to slide into recession in the coming months, the result of Fed tightening and an economy facing inflation still near 40-year highs. However, fourth-quarter GDP for 2022 is trailing a solid 3.9%, by far the best in a year that started with back-to-back negative readings, according to the Atlanta Fed.
Minneapolis Fed Chairman Neel Kashkari said in a message on the district’s website Wednesday that he sees the funds rate rising to 5.4% and possibly more if inflation does not was not falling.
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