Federal Reserve officials at their most recent meeting expressed little desire to cut interest rates any time soon, particularly as inflation remains well above their target, according to minutes released Tuesday.
The summary of the meeting, held from October 31 to November 31. 1, showed that members of the Federal Open Market Committee are still concerned that inflation may be persistent or increasing, and that more may need to be done.
At the very least, they said policy will have to remain “restrictive” until data shows inflation is on a convincing path back to the central bank’s 2% target.
“In discussing the policy outlook, participants continued to judge that it was critical that the monetary policy stance remain sufficiently restrictive to return inflation to the Committee’s 2 percent target over time,” the minutes said.
Beyond that, however, the minutes showed that members believe they can act “carefully” and make decisions “on the totality of incoming information and its implications for the economic outlook as well as the balance of risks.”
The release comes amid overwhelming sentiment on Wall Street that the Federal Reserve has ended the hikes.
Traders in the federal funds futures market indicate that there is virtually no chance that authorities will raise rates again this cycle and, in fact, are pricing in cuts as early as May. Ultimately, the market expects the Federal Reserve to enact cuts equivalent to four quarters of a percentage point before the end of 2024.
No mention of cuts
However, the minutes gave no indication that members had even discussed when they might begin lowering rates, which was reflected in Chairman Jerome Powell’s post-meeting news conference.
“The fact is that the Committee is not thinking about rate cuts at all right now,” Powell said then.
The Federal Reserve’s benchmark funds rate, which sets short-term borrowing costs, is currently in a range between 5.25% and 5.5%, the highest level in 22 years.
The meeting came amid market concerns about rising Treasury yields, a topic that appeared to generate substantial discussion during the meeting. On the same day, November 1, when the Federal Reserve released its post-meeting statement, the Treasury Department announced its borrowing needs for the coming months, which were actually a little lower than markets had anticipated.
10-year, 3-month Treasury yield
Since the meeting, yields have retreated from 16-year highs as markets digest the impact of heavy debt-driven government borrowing and views on where the Federal Reserve is headed with rates.
Officials concluded that the rise in yields had been driven by rising “term premiums,” or the additional yield that investors demanded to hold longer-term securities. The minutes noted that policymakers saw the rising term premium as a product of increased supply as the government finances its huge budget deficits. Other issues included the Federal Reserve’s stance on monetary policy and views on inflation and growth.
“However, they also noted that, whatever the source of the rise in long-term yields, persistent changes in financial conditions could have implications for the path of monetary policy and that it would therefore be important to continue monitoring closely the evolution of the market”. the minutes said.
Economic growth will slow
In other matters, officials said they expect economic growth in the fourth quarter to “slow noticeably” from the 4.9% increase in gross domestic product in the third quarter. They said risks to broader economic growth are likely skewed to the downside, while risks to inflation are skewed to the upside.
As for current policy, members said it “was restrictive and was putting downward pressure on economic activity and inflation,” according to the minutes.
Public comments from Fed officials have been divided between those who think the central bank can hold out while it weighs the impact its 11 previous hikes, totaling 5.25 percentage points, have had on the economy, and those who believe further increases are justified.
Economic data has also been mixed, although it is generally favorable for inflationary trends.
The Federal Reserve’s key inflation gauge, the personal consumption expenditures price index, showed core inflation hit a 12-month pace of 3.7% in September. The figure has improved considerably, falling one percentage point since May, but is still well above the Federal Reserve’s target.
Some economists think reducing inflation from here could be difficult, particularly with strong wage increases and more persistent components such as high rent and health care. In fact, so-called sticky prices rose 4.9% over the past year, according to an indicator from the Atlanta Federal Reserve.
Regarding employment, perhaps the most critical factor in reducing inflation, the labor market is strong although it is moderating. Nonfarm payrolls rose by 150,000 in October, one of the slowest months of the recovery, although the unemployment rate has risen to 3.9%. Half a percentage point increase in the unemployment rate, if it persists, is commonly associated with recessions.
Economic growth, after a strong first three quarters in 2023, is expected to slow considerably. The Atlanta Federal Reserve’s GDPNow tracker points to 2% growth in the fourth quarter.
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