WASHINGTON – Federal Reserve officials have pledged themselves to the fight against inflation and expect higher interest rates to remain in place until more progress is made, according to minutes released Wednesday from the central bank’s December meeting.
At a meeting where policymakers raised their key interest rate by another half a percentage point, they stressed the importance of maintaining restrictive policies while inflation remains unacceptably high.
“Participants generally noted that until incoming data provided confidence that inflation was on a sustained downward path to 2 percent, a hawkish policy stance would need to be maintained, which would likely take some time,” reads the executive summary meeting. “With inflation persistent and unacceptably high, several participants noted that historical experience warns against easing monetary policy prematurely.”
The hike ended a streak of four consecutive three-quarter-point hikes, while the target range for the Fed Funds benchmark rate was raised to 4.25%-4.5%, its highest level in 15 years.
Officials also said they would focus on data moving forward and “see the need to maintain flexibility and optionality” in relation to the policy.
Officials also warned that the public should not read too much about the rate-setting Federal Open Market Committee’s move to slow the pace of hikes.
“Some participants stressed that it would be important to communicate clearly that a slowdown in the pace of interest rate hikes does not indicate a weakening of the Committee’s determination to achieve its price stability target, or a view that inflation is already at levels sustained downward course,” says the record.
After the meeting, Fed Chair Jerome Powell indicated that while there had been some progress in the fight against inflation, he saw only tentative signs and expected interest rates to remain at higher levels after hikes ended.
The minutes reflected this sentiment, noting that despite market prices, no FOMC members expect rate cuts in 2023.
Markets are currently pricing in the likelihood of rate hikes totaling 0.5-0.75 percentage points before pausing to assess the impact of the hikes on the economy. Traders expect the central bank to approve a quarter-point hike at its next meeting, which ends on Feb. 1, according to data from CME Group.
Current pricing also points to the possibility of a modest rate cut by the end of the year, with the overnight rate set to end up in a range of 4.5% to 4.75%. However, Fed officials have repeatedly expressed doubts about an easing of monetary policy in 2023.
The minutes noted that officials grapple with twofold policy risks: first, that the Fed is not keeping interest rates high long enough, allowing inflation to simmer much like it did in the 1970s; and second, that the Fed has been holding on to restrictive policy for too long and slowing down the economy too much, “potentially placing the greatest burdens on the most vulnerable.”
However, members said they see the risks more in premature easing and unbridled inflation.
“Respondents generally indicated that upside risks to the inflation outlook remain a key factor shaping the outlook for monetary policy,” the minutes read. “Participants generally found that, from a risk management perspective, it is appropriate to maintain a restrictive policy stance for an extended period of time until inflation is clearly on track towards 2 percent.”
Along with the rate hikes, the Fed has shrunk the size of its balance sheet, adding up to $95 billion in proceeds each month. In a program launched in early June, the Fed’s balance sheet shrank $364 billion to $8.6 trillion.
While some recent inflation measures showed progress, the labor market, a critical target of rate hikes, has been resilient. Non-farm payrolls growth exceeded expectations for most of last year, and data earlier Wednesday showed that the number of job vacancies there is still almost double the number of workers available.
The Fed’s preferred measure of inflation, the personal consumption expenditure index excluding food and energy, was 4.7% annually in November, down from its peak of 5.4% in February 2022 but still well above the Fed’s target of March 2 %.
Economists, meanwhile, are widely expecting the US to enter a recession in the coming months as a result of Fed tightening and an economy struggling with inflation still hovering near 40-year highs. However, fourth-quarter GDP for 2022 is at a solid 3.9% rate, which is by far its best year to start on consecutive negative readings, according to the Atlanta Fed.
Minneapolis Fed President Neel Kashkari said in a post for the district’s website on Wednesday that he sees a key rate hike to 5.4% and possibly higher if inflation doesn’t trend down.