Federal Reserve officials agreed at their November meeting that it would soon be appropriate to slow rate hikes, minutes from the rally showed as they shifted their focus to how high interest rates will eventually rise.
Central bankers raised interest rates by three quarters of a percentage point for the fourth time in a row at their meeting on 1-2. November, bringing the federal funds rate to nearly 4 percent. Back in March, rates were set just above zero.
The Fed is waging the most aggressive campaign to tighten the economy in decades as it tries to fight it the fastest inflation since the 1980s back under control. By making it more expensive to borrow money, the Fed’s rate moves can cool demand throughout the economy, allowing supply to return to balance and price rises to moderate.
But officials are debating how much more action is needed to catch up with inflation. They want to make sure they’re doing enough: Failure to quickly curb inflation could make it a more permanent feature of the U.S. economy, making it even harder to contain later. But policymakers want to avoid doing more than necessary to curb price rises, as that could cost jobs and lower wages, leaving people economically worse off.
Achieving this balance will be a challenge for the Fed. The economy is behaving unusually after years of pandemic disruptions, and policymakers have few modern episodes of high inflation to use as benchmarks. Many economists expect inflation to weaken next year as rents slow and demand for goods eases, but forecasters have been repeatedly surprised by the continued strength of inflation over the past 18 months.
what is inflation Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in the prices of everyday goods and services such as food, furniture, clothing, transport and toys.
That’s why officials are considering an early slowdown. Raising rates more gradually – but to a higher final level – will allow them to show they are committed to fighting inflation, while also giving them more time to monitor how their moves so far are working.
There was broad agreement that 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.
It was not clear from the minutes exactly when the central bank will slow rate hikes, but investors expect it could back off by as much as half a point next month.
In addition to giving officials more time to see how policy evolves, a more gradual approach could “reduce the risk of instability in the financial system,” “several” Fed officials said at the meeting. However, several other participants thought it might be better to wait until rates are even higher before slowing the pace of growth.
Whatever the pace, Fed officials stressed in November that the most important thing is the goal. Officials have indicated they are likely to raise rates higher than they expected back in September as the economy is proving relatively resilient, with several suggesting rates could climb to 5 percent or higher.
Understand inflation and how it affects you
How high rates rise and how long they stay high “have become more important factors in achieving the Committee’s goals than the pace of further increases,” the minutes showed, referring to the Federal Open Market Committee, which guides monetary policy. “Participants agreed that communicating this distinction to the public is important to reinforce the Committee’s strong commitment to returning inflation to the 2 percent target.”
Fresh inflation data since the Fed’s last meeting suggests that price hikes may finally be turning the corner. Consumer price index data showed inflation fell to 7.7 percent in the year to October, down from 8.2 percent previously, as some goods prices fell into outright decline.
Given how much the Fed has raised interest rates this year, many economists expect consumer spending and the labor market to cool by 2023, which could help ease prices further.
But so far the economy is proving fair persistent. 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 have more work to do in terms of slowing the economy — although the minutes showed that “some” central bankers have begun to warn that the risk has increased excessive tightening of monetary policy.
“Many participants noted that price pressures have increased in the services sector and that historically price pressures have been more persistent in that sector than in the goods sector,” the note noted, later adding that “risks to the inflation outlook remained tilted. up.”