With inflation still the focus, the Fed minutes show openness to a higher-rate endgame

By Howard Schneider and Michael S Derby

WASHINGTON (Reuters) – Almost all Federal Reserve policymakers supported a decision to further slow the pace of interest rate hikes at the Federal Reserve’s last meeting, but said containing unacceptably high inflation was the “key factor” in doing so would need further interest rates rise.

In language that suggested a compromise between officials worried about a slowing economy and those confident inflation would prove stubborn, minutes from the 1/31 meeting said that the policymakers would have agreed that rates needed to rise higher, but that the deferral to smaller rate hikes would allow them to align more closely with incoming data.

“Almost all participants agreed that it was appropriate to raise the federal funds rate target range by 25 basis points,” with many saying it would allow the Fed to better determine “the magnitude” of future hikes, it said published in the minutes on Wednesday.

At the same time, “participants generally noted that upside risks to the inflation outlook remain a key factor in shaping the policy outlook” and that interest rates need to rise and remain high “until inflation is clearly on track towards 2%. “

Only “few” participants directly advocated a larger half a percentage point increase at the meeting or said they “could have supported it”.

The Fed conducted a series of 75 basis point and 50 basis point rate hikes in 2022 to stem inflation, which had risen to 40-year highs. The central bank’s policy rate is currently in the 4.50% to 4.75% range.

The minutes’ reference to inflationary risks as “key” for monetary policy means the latest data — showing less progress than hoped — could mean a higher forecast breakpoint for the federal funds rate when policymakers end the 21.22 meeting , said Omair Sharif, President of Inflation Insights.

Recent inflation data and upward revisions to previous numbers mean that the “upside risks to inflation,” cited by policymakers in the minutes, “are clearly much higher today than they were at the last meeting of the (Federal Open Market) Committee,” Sharif said Reference to the central bank’s monetary policy decision-making committee. “March dots set to head higher” with projected median interest rates perhaps rising as high as 5.6% year-end compared to December’s “dot plot” forecast of 5.1%.

Bond yields rose after the minutes were released and the US dollar also appreciated against a basket of currencies. A modest recovery in US stocks fizzled out.

The yield on the 2-year Treasury, the maturity of the Treasury most sensitive to Fed policy expectations, rose about 4 basis points from pre-release levels to around 4.69%. The S&P 500 Index, which was up about 0.25% before the minutes were published, closed lower.

Futures traders tied to the Fed’s benchmark rate put their bets on at least three more quarter-point rate hikes in the upcoming sessions, with contract prices pointing to a peak range in policy rates of 5.25% to 5.50%.


The minutes showed the Fed navigating to a possible endpoint of its current rate hikes while slowing the pace to approach a possible breakpoint more cautiously, while leaving open the question of how high rates will ultimately rise if inflation fails to slow .

The reading of the meeting contained particularly pointed back-and-forth references to a number of developments in the economy, which contributed to the still great uncertainty about where the journey would go.

While “some” participants saw an “increased” chance of a recession in the United States this year and pointed to a fall in consumer spending in late 2022, others noted that households remained sitting on excess savings and that some local governments had “sizable budget surpluses, which could also help stave off a painful downturn.

Corporate investments were “subdued” at the end of the year. Still, “a few” attendees at the Fed’s last meeting said that companies “appeared more optimistic,” that supply shortages had been resolved, and that the global economic environment was improving and “could be supportive of final demand in the United States.”

According to the minutes, the labor market remained hot, and companies — at least outside the tech sector — “keen to retain workers even in the face of softening demand,” a factor that would help sustain household incomes and spending.


The Fed’s February 1 policy statement said “ongoing rate hikes” were still needed, but shifted the focus from the pace of the coming rate hikes to their “magnitude,” an indication that policymakers believe they are headed for one Interest rate approach is sufficient to ensure steady progress in bringing down inflation.

Data since the last meeting has shown that the economy continues to grow and create jobs at a faster-than-expected pace, while making slower progress toward the Fed’s 2% inflation target. The central bank’s preferred inflation rate came in at two-and-a-half times target in December, with January data due on Friday.

Minutes showed that Fed officials are still prepared for the risk that they may have to do more to let inflation fall, a hawkish bias that could come more into focus as policymakers announce new interest rates at the meeting and publish economic forecasts.

“Participants agreed that the committee had made significant progress over the past year in moving toward sufficiently restrictive monetary policy,” the minutes said, describing an economy that continued to grow amid a tight labor market.

“Nevertheless, while there were signs that the cumulative effect of the Committee’s monetary tightening stance had begun to moderate inflationary pressures, participants agreed that inflation was well above the Committee’s longer-term target of 2% and the The labor market remained very tight.”

(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)


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