The minutes from the Fed showed that policymakers were still committed to easing inflation

Federal Reserve officials believed they needed to do more at their meeting earlier this month to slow the economy and bring painfully fast inflation back under control. the minutes from the meeting showed.

The remarks released on Wednesday showed that “all stakeholders” continue to believe that rates need to be raised further, and that “a number” of them think that monetary policy may need to be even tighter in light of the easing conditions in the financial sector. markets in previous months.

And policy was expected to remain on a tightening setting “until incoming data provide confidence that inflation is steadily falling to 2 percent, which is likely to take some time,” the note showed, citing the Fed’s official target for annual rate hikes.

The bottom line is that policymakers were still focused on getting inflation under control even before a flurry of recent data releases showed the economy maintaining surprising momentum in early 2023. In the weeks since the last Fed meeting, inflation data has shown unexpected enduranceand a number of data points indicated that both the labor market and consumer spending stay robust. Friday’s report is expected to show that the Fed’s preferred gauge of inflation rose sharply in January on a monthly basis and that consumption grew at a solid pace.

That poses a challenge for Fed officials, who had hoped that their policy changes last year would slowly but steadily weigh on the economy, cool demand and force companies to stop raising prices so quickly. If demand is sustained, businesses are more likely to find that they can continue to charge more without driving away their customers.

Over the past year, central bankers have raised interest rates at the fastest pace since the 1980s, pushing them from zero now to more than 4.5 percent in 2022 as of this month. Officials signaled in December that they might have to raise rates above 5 percent this year, but those estimates were creeping upperhaps above 5.25 percent. And key policymakers have made clear that if the economy does not slow as expected, they will do more to ensure the pace cools.

Higher interest rates weigh on the economy by making it more expensive for households to borrow to buy a new car or house, and more expensive for businesses to borrow. As these transactions stall, aftershocks ripple through the economy, slowing down not only the housing and auto markets, but also the labor market and retail and service spending as a whole.

But the full effect of policy takes time to play out, making it difficult for central bankers to assess in real time how much policy tightening is just the right amount to slow the economy and bring inflation down. Overdoing it could come at a cost: Leaving more people out of work, with lower incomes and more limited prospects than necessary.

But the 1970s taught central bankers that allowing inflation to remain high for long periods without decisive action to bring it under control was also a painful mistake. Back then, the Fed allowed inflation to fly higher, and it eventually got so out of control that they had to implement draconian rate hikes to scramble for prices. Unemployment jumped to double digits.

Officials slowed rate hikes in February and indicated they would continue to raise rates by a modest quarter-point each session in the coming sessions. Some policymakers—including Loretta Mester at the Federal Reserve Bank of Cleveland — it was clear in public that they would prefer a bigger step at the last meeting.

While the minutes acknowledged that “several participants” would support or even prefer a half-point move, they said minor adjustments were seen as a way to balance the risks.

Almost all noted that the slowdown “will allow for appropriate risk management as the committee assesses the extent of further tightening needed to meet the committee’s objectives,” the minutes said.

The question now is how high rates have to go and how long they will stay there.

That’s the challenge for central bankers several factors are at play in early 2023 suggest that the economy retains considerable strength. Americans get jobs and win raises, increasing household incomes. They are still sitting on piles of savings accumulated during the pandemic, even if they are dwindling. Many older households saw their cost of living increase by 8.7 percent during their first Social Security check of the year.

Even from the Jan. 31-Feb. 1 meeting, officials saw several reasons why inflation could remain too high: China’s reopening due to the coronavirus lockdown could boost demand, Russia’s war in Ukraine could cause supply disruptions and the labor market could stay strong. longer than expected by minutes.

But policymakers also saw reasons why inflation could weaken quickly. Among them, many global central banks have raised interest rates, and the US could be vulnerable to slipping into an outright recession after a period of subdued growth. Additionally, the United States could face financial or economic problems if the congressional debate were to end increasing the debt limit it pulls out.

“A number of participants emphasized that a protracted period of negotiations to raise the federal debt limit could pose significant risks to the financial system and the broader economy,” the minutes said.