Fed officials believed rates could rise further if inflation remained stubborn

Federal Reserve officials are weighing whether they will need to raise interest rates again to calm the economy and ensure that rapid inflation subsides completely, and minutes from their meeting earlier this month charted the contours of this debate.

“Participants noted that further tightening of monetary policy would be appropriate if available information indicated that progress toward the committee’s inflation target was insufficient,” according to the minutes of the October 31-November meeting. of the central bank. 1 meeting, which were published on Tuesday.

Fed officials believed that “data arriving in the coming months would help clarify the extent to which the disinflation process was continuing.”

Central bankers voted to keep interest rates unchanged in a range of 5.25 to 5.5 percent at their meeting earlier this month, giving themselves more time to assess whether the substantial changes in rates so far are weighing on demand.

Wall Street is very focused on what those in charge will do next. Fed policymakers had predicted another rate hike in 2023 in their September economic projections, but investors think there is little chance they will raise rates at their final meeting of the year, the December 12 and 13. Tuesday’s minutes could serve to reinforce expectations of an extended pause, as they suggest officials plan to watch how the economy develops over “months.”

Fed watchers are now trying to determine whether officials are done raising interest rates for good and, if so, when they are likely to start cutting them. Policymakers will release a new set of quarterly economic forecasts after their December meeting. This, combined with remarks from Fed Chairman Jerome H. Powell, could provide important clues about the future.

In September, policymakers expected a rate cut before the end of 2024. If that prediction holds true and Mr. Powell suggests that policymakers are not eager to raise rates again, investors could focus all their attention on how quickly the rate cuts will arrive. For now, market prices suggest that Wall Street expects policymakers to begin lowering interest rates during the first half of 2024.

But if Fed officials use December’s economic projections to predict that rates could stay higher for longer — or if Mr. Powell suggests that a rate increase next year remains firmly on the table — it could at least vaguely maintaining the possibility of further action. Several central bankers have made clear in recent weeks that they are not sure they are finished raising interest rates.

“I wouldn’t rule out further strengthening,” Susan Collins, president of the Federal Reserve Bank of Boston, said in an interview on CNBC last week.

Minutes from the Fed’s November meeting clarified how policymakers view the outlook. While officials wanted to make sure they cooled the economy enough to ensure inflation returned to its 2% target on time, they also wanted to avoid overdoing it by raising rates too much and risking a painful recession.

Fed officials believed that “with monetary policy moving into restrictive territory, the risks to achieving the committee’s goals had become more bilateral,” the minutes said, even though “most participants continued to see upside risks to inflation.”

Consumer price index inflation fell to 3.2% in October, after peaking above 9% in the summer of 2022. Despite this, officials fear it could prove difficult to fight against inflation until the end of the return to normal.

Fed officials set their inflation target using a separate but related measure, the personal consumption expenditures index, which appears with a longer delay. The October PCE figures are due to be released on November 30.

Fed officials are closely monitoring the strength of the labor market and the economy, while trying to determine whether inflation is likely to be fully contained. If the economy remains too buoyant – with consumers spending freely and businesses hiring workers – businesses could continue to raise prices faster than usual.

Since its last meeting, the Fed has received positive news on this subject. Although employers continued to hire in October, they did so at a much slower pace: They hired only 150,000 workers, and previous hiring figures were revised downward.

The minutes suggest that policymakers watch for signs that “labor markets are reaching a better balance between supply and demand.”

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