Fed officials discussed slowing interest rate hikes ‘soon’

Federal Reserve officials agreed at their November meeting that it would soon be appropriate to slow interest rate hikes, minutes of the meeting showed, as they focused on how high interest rates will eventually rise.

Central bankers raised interest rates by three-quarters of a percentage point for the fourth straight time at their November 1-2 meeting, bringing the federal funds rate to nearly 4%. Rates were pegged just above zero as recently as March.

The Fed has waged the most aggressive campaign to rein in the economy in decades as it tries to rein in the fastest inflation since the 1980s. By making it more expensive to borrow money, rate moves from the Fed can cool demand across the economy, allowing supply to rebalance and price increases to moderate.

But officials are debating the scale of additional measures needed to ensure inflation stabilizes. They want to make sure they’re doing enough: failing to get inflation under control quickly could make it a more permanent feature of the US economy, making it even harder to eradicate later. But policymakers want to avoid doing more than necessary to limit price rises because it could cost jobs and cut wages, making people’s economic situation worse.

Finding this balance will be a challenge for the Fed. The economy is behaving uncharacteristically after years of pandemic disruption, and policymakers have few modern episodes of high inflation to use as benchmarks. Many economists expect inflation to subside next year as rents slowly rise and demand for goods moderates, but forecasters have repeatedly been surprised by the persistence of inflation over the past 18 months.

This is why the authorities plan to slow down soon. Raising rates more gradually – but to a higher ultimate level – will allow them to show they are committed to fighting inflation while giving themselves more time to observe how their moves so far are working out.

“It was widely accepted that the increased uncertainty about the outlook for inflation and real activity underscored the importance of taking into account the cumulative tightening of monetary policy, the lags with which monetary policy affected economic activity and inflation, and economic and financial developments”, the minutes showed.

The minutes did not specify when exactly the central bank will slow its rate hikes, but investors expect it could return to a half-point move next month.

In addition to giving officials more time to see how policies unfold, a more gradual move could “reduce the risk of instability in the financial system,” “a few” Fed officials said at the meeting. But a few other participants thought it might be best to wait until rates were even higher before slowing the pace of increases.

Regardless of the pace, Fed officials stressed in November that the destination is the most important. Officials have suggested they are likely to raise rates higher than they had expected as recently as September, when the economy is proving quite resilient, with many suggesting rates could climb to 5% or more.

How rates rise and how long they stay high “had become more important considerations in achieving the Committee’s goals than the pace of further increases,” the minutes showed, referring to the Federal Open Market Committee, which directs monetary policy. “Participants agreed that communicating this distinction to the public was important in order to reinforce the Committee’s strong commitment to bringing inflation back to the 2% target.”

Since the last Fed meeting, new inflation data suggests that price increases may finally be turning a corner. Consumer price index data showed inflation eased to 7.7% in the year to October, from 8.2% previously, as some goods prices sank into an outright decline.

Given the Fed’s interest rate hike this year, many economists expect consumer spending and the labor market to cool by 2023, which could help prices recover. moderate more.

But so far, the economy is proving quite robust. Consumer spending is slowing somewhat, but not falling off a cliff.

Demand for workers remains strong and wages continue to rise, factors that have prompted many Fed officials to say they still have work to do when it comes to slowing the economy — even though the minutes showed that “some” central bankers have begun to warn that the risk of excessive monetary policy tightening has increased.

“Many participants observed that pricing pressures had increased in the services sector and that historically, pricing pressures in this sector had been more persistent than those in the goods sector,” the minutes note. , adding later that “the risks to the outlook for inflation remain tilted.” on the rise.