Fed minutes show officials feeling better about inflation

Federal Reserve officials wanted to use their final 2023 policy statement to signal that interest rates could be at an all-time high, even as they left the door open for future rate hikes. the minutes of their December meeting showed.

The memos, released Wednesday, explain why officials changed a key phrase in that statement — adding “all” to the phrase promising that officials would work to assess “the extent of any additional policy tightening that may be appropriate “. This was to relay the view that policy “was probably now at or near its peak” as inflation moderated and rising interest rates appeared to be working as intended.

Federal Reserve officials left interest rates unchanged in their Dec. 13 policy decision and expect them to reduce borrowing costs by three in 2024. Both the meeting itself – and the new minutes outlining the Fed’s thinking – suggest the central bank is heading into the next phase of its fight against rapid inflation.

“Several participants noted that the Committee’s past policy actions have had the desired effect of helping to slow the growth of aggregate demand and cool labor market conditions,” the minutes read at another moment. Given this, “they expected that the Committee’s restrictive policy would continue to dampen household and business spending, thereby helping to promote further reductions in inflation over the coming years.”

The Fed quickly raised interest rates starting in March 2022, hoping to slow economic growth by making it more expensive for households and businesses to borrow money. The economy has remained surprisingly resilient in the face of these measures, which have pushed interest rates to their highest level in 22 years.

But inflation has slowed sharply since mid-2023, with the Fed’s preferred measure of rising prices rising 2.6% in the year through November. Although this figure is still faster than the 2% inflation target set by the central bank, it is much more moderate than the 2% target set by the central bank. Peak 2022, which was more than 7 percent. This allowed the Fed to move away from rate increases.

Officials previously expected to make a final quarter-point in 2023, which they ultimately ignored. Now, Wall Street is focused on when it will start cutting interest rates and how quickly it will bring them down. While rates are currently set in a range of 5.25 to 5.5 percent, investors bet that they could fall to between 3.75 and 4% by the end of 2024, based on market prices before the minutes were published. Many expect rate reductions start in March.

But Fed officials have suggested they may need to keep interest rates at least high enough to weigh on growth for some time. Much of the recent progress has come as supply chain issues have dissipated, but further slowdown could require a sharp economic downturn.

“Several participants felt that the healing of supply chains and labor supply was largely complete and that, therefore, continued progress in reducing inflation may have to come primarily from ‘a further slowdown in demand for products and labor, with restrictive monetary policy continuing to play a central role. » says the minutes.

Other sectors of the economy are showing signs of slowing. Although growth and consumption have remained surprisingly strong, hiring has declined. Job openings fell in November to their lowest level since the start of 2021, according to data released Wednesday.

Some Fed officials “noted that their contacts reported more applicants for open positions, and some participants pointed out that the vacant-to-unemployed ratio had declined to just over its level just before the pandemic,” notes the minutes.

Fed officials also discussed their balance sheet of bonds, which they accumulated during the pandemic and which have declined by allowing the securities to expire without reinvesting them. Policymakers will have to stop reducing their holdings at some point, and several officials “suggested that it would be appropriate for the Committee to begin discussing the technical factors that would guide a decision to slow the pace of runoff well before such a decision is made. to provide appropriate notice to the public.