With inflation still in focus, the Fed’s meeting minutes show an openness to the high interest rate endgame

WASHINGTON (Reuters) – Almost all Federal Reserve policymakers rallied behind a decision to slow the pace of interest rate hikes at the US central bank’s latest policy meeting, but they also noted that curbing unacceptably high inflation would be the “key factor.” In the amount of need for other higher rates.

In language that suggested a compromise between officials worried about a slowing economy and those convinced that inflation would prove persistent, Minutes from January 31 to February. The first meeting said that policymakers agreed that prices would need to be raised, but a shift to smaller increases would allow them to calibrate more closely to the data coming in.

“Almost all participants agreed that it was appropriate to raise the target range for the federal funds rate by 25 basis points,” the minutes said, with many of those saying it would make the Fed better “range” future increases. Released on Wednesday.

At the same time, “respondents generally noted that upside risks to inflation expectations remained a major factor in shaping policy expectations, and that interest rates would need to rise and stay high” until inflation is on a clear path to 2%. “

Only a “few” of participants favored a larger half-percentage-point increase in the meeting, or said they “could have supported it.”

The Fed has delivered a series of interest rate increases of 75 basis points and 50 basis points in 2022 in its battle to curb inflation that has soared to its highest levels in 40 years. The central bank’s policy rate is currently in the range of 4.50%-4.75%.

The minutes’ reference to inflation risks as a policy “key” means that recent data – showing less progress than expected – could mean an expected higher stop for the federal funds rate when policymakers release new forecasts at the end of March 21. Amir Sharif, Head of Inflation Insights, said at the 22nd Meeting.

Sharif said the recent inflation data and upward revisions to previous numbers mean that the “upside risks to inflation” that policymakers cited in the minutes “are clearly much higher today than when the (Federal Open Market) committee last met,” referring to the committee. Putting policies in the central bank. “March points will move higher,” as the expected average policy rate at the end of the year is likely to rise to 5.6%, compared to the average 5.1% “plot point” projection in December.

Bond yields rose after the minutes were released and the US dollar rose against a basket of currencies. A modest rally in US stocks faded.

The yield on two-year Treasury notes, the government bond maturity most sensitive to the Fed’s policy outlook, rose about 4 basis points from its pre-issue level to around 4.69%. The S&P 500 (.SPX), up about 0.25% before the minutes were released, closed lower.

Fed policy rate-linked futures traders have added to bets on at least three more quarter-percentage-point rate hikes at upcoming meetings, with contract pricing pointing to a higher band for the federal funds rate of 5.25%-5.50%.

recession risks

The minutes showed the Fed heading towards a potential endpoint of its current rate hike, simultaneously slowing the pace in order to more cautiously approach a potential stopping point while leaving open how higher rates might eventually pick up should inflation not slow.

The readings of the meeting included particularly specific back-and-forth references to a range of developments in the economy that contributed to a continuing large degree of uncertainty about the direction of things.

While some respondents saw a “high” probability of a recession in the United States this year, and pointed to lower consumer spending at the end of 2022, others noted that households continued to rely on excess savings and that some local governments had “significant budget surpluses.” They can also help avoid a painful contraction.

Business investment was “weak” at the end of the year. However, “two” respondents at the recent Fed policy meeting said that companies “appeared more confident” that supply bottlenecks had been eliminated, that the global economic environment was improving and “could provide support for final demand in the United States.” .

The labor market remains hot, the minutes said, with companies — at least outside the technology sector — “eager to retain workers even in the face of slowing demand,” a factor that should help sustain household income and spending.

‘Extremely tight’ job market

The Fed’s Feb. 1 policy statement said “continued increases” in rates were still needed, but shifted focus from the pace of upcoming hikes to the “extent,” referring to the fact that policymakers feel they may be close to a sufficient rate to ensure progress. Steady reduction in inflation.

Data since the last meeting showed the economy continued to grow and add jobs at an unexpectedly fast pace, with less progress toward the Fed’s 2% inflation target. Inflation was the central bank’s preferred measure in December at two-and-a-half times the target, and data for January is due on Friday.

The minutes showed that Fed officials remain attuned to the risk that they may have to do more in order to keep inflation low, a hawkish tendency that may come to a more nuanced view when policymakers release a new interest rate and economic outlook at the meeting.

“Participants agreed that the committee has made significant progress over the past year in moving toward a sufficiently restrictive monetary policy stance,” the minutes said, describing an economy that continued to grow amid a tight labor market.

However, participants agreed that while there were signs that the cumulative effect of the Committee’s tightening of monetary policy stance had begun to ease inflationary pressures, inflation remained well above the Committee’s long-term target of 2% and the labor market remained very tight.

(Reporting by Howard Schneider). Editing by Dan Burns and Paul Simao

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