Federal Reserve officials are contemplating whether they will need to raise interest rates again to cool the economy and ensure rapid inflation disappears completely, and minutes from their meeting earlier this month laid out the contours of that debate.
“Participants noted that further tightening of monetary policy would be appropriate if incoming information indicated that progress toward the committee’s inflation target was insufficient,” according to central bank minutes from Oct. 31 to Nov. 31. 1 meeting, which were published on Tuesday.
Federal Reserve officials thought that “data arriving in the coming months would help clarify the extent to which the disinflation process continues.”
Central bankers voted to leave interest rates unchanged at a range of 5.25 to 5.5 percent at their meeting earlier this month, giving them more time to assess whether their major policy moves rates so far are weighing on demand.
Wall Street is very focused on what officials will do next. Fed policymakers had forecast one more rate move in 2023 based on their September economic projections, but investors believe there is little chance of a rate hike at their final meeting of the year on Dec. 12-13. Tuesday’s minutes may serve to reinforce that expectation of a prolonged pause, because they suggested that officials planned to watch how the economy took shape over the course of “months.”
Federal Reserve watchers are now trying to determine whether officials have conclusively ended raising interest rates and, if so, when they are likely to begin cutting them. Policymakers will release a new set of quarterly economic forecasts at the conclusion of their December meeting. This, along with comments from Federal Reserve Chairman Jerome H. Powell, could provide important clues about the future.
In September, authorities expected to lower rates before the end of 2024. If that forecast holds and Powell hints that authorities are not eager to raise rates again, investors could turn all their attention to how soon cuts will come. of rates. For now, market prices suggest that Wall Street expects authorities to begin reducing interest rates sometime in the first half of 2024.
But if Fed officials use December economic projections to predict that rates could stay high longer – or if Powell suggests that a rate hike next year remains firmly on the table – it could at least vaguely keep alive the possibility of more actions. Several central bankers have made clear in recent weeks that they are not sure they are done raising interest rates.
“I wouldn’t rule out additional reinforcement,” Susan Collins, president of the Federal Reserve Bank of Boston, said in an interview on CNBC last week.
The minutes of the Federal Reserve’s November meeting fleshed out how policymakers think about the outlook. While officials wanted to make sure they were cooling the economy enough to ensure inflation returned to its 2 percent target in a timely manner, they also wanted to avoid overdoing it by raising rates too much and risking a painful recession.
Federal Reserve officials thought that “with the monetary policy stance in restrictive territory, the risks to achieving the committee’s objectives had become more bilateral,” the minutes said, although “most participants continued to see upside risks to inflation.”
Consumer Price Index inflation fell to 3.2 percent in October, from a peak above 9 percent in the summer of 2022. Still, officials worry it may prove difficult to fight inflation during the rest of the way to get back to normal.
Federal Reserve officials define their inflation target using a separate but related measure, the personal consumption expenditures index, which appears with a longer lag. October PCE figures will be published on November 30.
Federal Reserve officials have been carefully watching the strength of the labor market and the economy as they try to determine whether inflation is likely to come completely under control. If the economy remains too vibrant (with consumers spending freely and companies recruiting workers), companies may continue to raise prices at a faster rate than usual.
Since its last meeting, the Federal Reserve has received some positive news on that front. While employers continued hiring in October, they did so at a much slower pace: They hired only 150,000 workers, and previous hiring numbers were revised downward.
The minutes suggested that policymakers were watching for signs that “labor markets were achieving a better balance between supply and demand.”